<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1996
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________________
MFS COMMUNICATIONS COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4813 47-0714388
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
11808 MIRACLE HILLS DRIVE
OMAHA, NEBRASKA 68154
(402) 231-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
TERRENCE J. FERGUSON, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
MFS COMMUNICATIONS COMPANY, INC.
11808 MIRACLE HILLS DRIVE
OMAHA, NEBRASKA 68154
(402) 231-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
WITH COPIES TO:
JOHN S. D'ALIMONTE, ESQ. AUGUST J. MORETTI, ESQ.
STEVEN J. GARTNER, ESQ. RICHARD FRIEDMAN, ESQ.
WILLKIE FARR & GALLAGHER HELLER EHRMAN WHITE & MCAULIFFE
ONE CITICORP CENTER 525 UNIVERSITY AVENUE
153 EAST 53RD STREET PALO ALTO, CALIFORNIA 94301
NEW YORK, NEW YORK 10022 (415) 324-7000
(212) 821-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.
1
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PROPOSED PROPOSED AMOUNT OF
TO BE REGISTERED REGISTERED MAXIMUM MAXIMUM REGISTRATION
OFFERING AGGREGATE FEE (1)
PRICE PER OFFERING
SHARE (1) PRICE (1)
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share 59,440,187 $37.00 $2,199,286,919 $758,375
(1)
===============================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act, based on the high and low sales prices
of the Common Stock quoted on the Nasdaq National Market on May 16, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
2
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Item 501 of Registration S-K showing the location in the Joint Proxy
Statement-Prospectus of the responses to the Items of Part 1 of Form S-4.
<TABLE>
<CAPTION>
Registration Statement
Item and Caption Joint Proxy Statement-Prospectus Caption
- ---------------------- ----------------------------------------
<S> <C>
1. Forepart of Registration Statement
and Outside Front Cover Page of Prospectus ............. Facing Page; Cross-Reference Sheet; Outside Front
Cover of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus........................................... Inside Front Cover of Prospectus; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information .................................. Summary; Summary Historical and Unaudited Pro
Forma Combined Condensed Information; and
Comparative Per Share Prices
4. Terms of the Transaction ................................ Summary; The Merger; The Merger Agreement; The
Stock Option Agreement; MFS Voting Agreement;
Description of MFS Capital Stock; Comparison of
Stockholders Rights
5. Pro Forma Financial Information ......................... Summary Historical and Unaudited Pro Forma
Combined Condensed Financial Information;
Unaudited Pro Forma Consolidated Financial
Statements-The Merger; Unaudited Pro Forma
Combined Financial Statements - Exercise of Option
6. Material Contracts with the Company Being
Acquired ............................................... The Merger Agreement
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters .......... Not Applicable
8. Interests of Named Experts and Counsel .................. Not Applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities ......... Not Applicable
10. Information with Respect to S-3 Registrants ............. Available Information; Incorporation of Documents
by Reference; Summary; Business of MFS; Description
of MFS Capital Stock
11. Incorporation of Certain Information by Reference ........ Available Information; Incorporation of Documents by
Reference
12. Information with Respect to S-2 or S-3 Registrants ...... Not Applicable
13. Incorporation of Certain Information by Reference ....... Not Applicable
</TABLE>
<PAGE>
<TABLE>
<S> <C>
14. Information with Respect to Registrants Other
Than S-2 or S-3 Registrants ............................ Not Applicable
15. Information with Respect to S-3 Companies ............... Not Applicable
16. Information with Respect to S-2 or S-3 Companies ........ Not Applicable
17. Information with Respect to Companies Other than
S-3 or S-2 Companies ................................... Summary; Business of UUNET; Selected Consolidated
Financial Data of UUNET; UUNET Management's
Discussion and Analysis of Financial Condition and
Results of Operations; UUNET Technologies, Inc.
Consolidated Financial Statements
18. Information if Proxies, Consents or Authorizations
Are to Be Solicited .................................... Summary; The UUNET Special Meeting; The MFS Annual
Meeting; The Merger; Management of UUNET; Security
Ownership of MFS; Security Ownership of UUNET
19. Information if Proxies, Consents or Authorizations
are Not to be Solicited or in an Exchange Offer ....... Not Applicable
</TABLE>
<PAGE>
MFS COMMUNICATIONS COMPANY, INC.
11808 Miracle Hills Drive
Omaha, Nebraska 68154
________, 1996
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
MFS Communications Company, Inc. ("MFS") to be held at [10:00] a.m. on
__________, _________, 1996, at _______________________________________.
At this important meeting, you will be asked to approve the issuance of MFS
common stock, par value $.01 per share (the "MFS Common Stock") in connection
with the Agreement and Plan of Merger, dated as of April 29, 1996 (the "Merger
Agreement"), among MFS, MFS Global Internet Services, Inc., a wholly owned
subsidiary of MFS ("Sub"), and UUNET Technologies, Inc. ("UUNET"). Pursuant to
the terms of the Merger Agreement, Sub will be merged with and into UUNET (the
"Merger"), and UUNET will become a wholly owned subsidiary of MFS.
Pursuant to the Merger, each outstanding share of UUNET common stock will
be converted into and represent the right to receive 1.777776 shares of MFS
Common Stock (the "Exchange Ratio"). The proposed Merger is described in the
accompanying Joint Proxy Statement-Prospectus, the forepart of which includes a
summary of the terms of the Merger and certain other information relating to the
proposed transaction. In addition, pursuant to a Stockholder Option, Voting and
Proxy Agreement, MFS has been granted an option (the "Option") by certain
stockholders of UUNET to purchase all such stockholders' shares of UUNET common
stock held on the date of exercise of the option (_____ shares of UUNET common
stock as of the MFS Record Date (as defined below)) for the Exchange Ratio. The
Option may be exercised at any time following the occurrence of a Purchase Event
(as defined in the Merger Agreement).
Gleacher NatWest Inc. ("Gleacher NatWest") was retained by MFS to act as
its independent financial advisor in connection with the Merger. As discussed in
the accompanying Joint Proxy Statement-Prospectus, Gleacher NatWest has
delivered to the MFS Board of Directors its written opinion that, as of April
29, 1996 and based upon and subject to certain matters stated in its written
opinion, the Exchange Ratio offered by MFS to the UUNET stockholders pursuant to
the Merger is fair from a financial point of view to MFS and its stockholders.
Certain stockholders of MFS who owned _______ shares of MFS Common Stock,
or approximately ____% of the outstanding shares of MFS Common Stock and
approximately ___% of the voting power of the MFS capital stock as of
__________, 1996, the Record Date for the Annual Meeting (the "MFS Record Date")
have advised MFS that they have granted irrevocable proxies in favor of UUNET to
vote all of such stockholders' shares of MFS Common Stock owned as of the MFS
Record Date in favor of the issuance of MFS Common Stock pursuant to the Merger
Agreement.
ON APRIL 29, 1996, YOUR BOARD OF DIRECTORS DETERMINED THAT THE MERGER IS
FAIR TO, AND IN THE BEST INTERESTS OF, MFS AND ITS STOCKHOLDERS. YOUR BOARD OF
DIRECTORS HAS APPROVED THE TERMS OF THE MERGER BY THE UNANIMOUS VOTE OF THOSE
DIRECTORS PRESENT AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE TO APPROVE
THE ISSUANCE OF MFS COMMON STOCK PURSUANT TO THE MERGER AGREEMENT.
At the Annual Meeting you will also be asked to consider and act upon the
following matters: (a) the reelection to the Board of Directors of MFS of the
four Class I Directors for a three-year term until the 1999 Annual Meeting of
Stockholders; (b) the adoption of amendments to the MFS 1993 Stock Plan; (c) the
adoption of amendments to the MFS 1995 Deferred Stock Purchase Plan; (d) the
ratification of the appointment by the MFS Board of Directors of Coopers &
Lybrand L.L.P. as independent auditors of MFS for the 1996 fiscal year; and (e)
the transaction of such other business as may properly come before the Annual
Meeting.
<PAGE>
The MFS Board of Directors recommends that its stockholders reelect the
four Class I directors for a three-year term until the 1999 Annual Meeting of
Stockholders, approve the proposed amendments to the MFS 1993 Stock Plan,
approve the proposed amendments to the MFS 1995 Deferred Stock Purchase Plan and
ratify the appointment by the MFS Board of Directors of Coopers & Lybrand L.L.P.
as independent auditors of MFS for the 1996 fiscal year. See "MFS REELECTION OF
CLASS I DIRECTORS PROPOSAL," "MFS AMENDMENT TO AMENDED AND RESTATED 1993 STOCK
PLAN PROPOSAL," "MFS AMENDMENT TO 1995 DEFERRED STOCK PURCHASE PLAN (AMENDED AND
RESTATED AUGUST 28, 1995) PROPOSAL" and "MFS RATIFICATION OF THE SELECTION OF
INDEPENDENT ACCOUNTANTS PROPOSAL," respectively.
Information concerning the matters to be considered and voted upon at the
Annual Meeting is set forth in the attached Notice of Annual Meeting and Joint
Proxy Statement-Prospectus. It is important that your shares be represented at
the Annual Meeting, regardless of the number you hold. Therefore, please sign,
date and return your proxy card as soon as possible, whether or not you plan to
attend the Annual Meeting. This will not prevent you from voting your shares in
person if you subsequently choose to attend the Annual Meeting.
Sincerely,
James Q. Crowe
Chairman of the Board
and Chief Executive Officer
<PAGE>
MFS COMMUNICATIONS COMPANY, INC.
11808 Miracle Hills Drive
Omaha, Nebraska 68154
----------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held _____________, 1996
---------------------------
To the Stockholders of MFS Communications Company, Inc.:
The Annual Meeting of Stockholders of MFS Communications Company, Inc., a
Delaware corporation ("MFS"), will be held at ____________________________ at
[10:00] a.m. on _________, __________, 1996 for the following purposes:
1. To approve the issuance (the "MFS Share Proposal") of MFS common
stock, par value $.01 per share ("MFS Common Stock") in connection
with either (i) the Agreement and Plan of Merger, dated as of April
29, 1996 (the "Merger Agreement"), among MFS, MFS Global Internet
Services, Inc., a wholly owned subsidiary of MFS ("Sub"), and UUNET
Technologies, Inc. ("UUNET"), pursuant to which (a) Sub will be merged
with and into UUNET (the "Merger") and UUNET will become a wholly
owned subsidiary of MFS, and (b) each outstanding share of UUNET
common stock, $0.001 par value per share (other than shares owned by
UUNET or its subsidiaries and MFS or its subsidiaries, all of which
will be canceled), will be converted into and represent the right to
receive 1.777776 shares of MFS Common Stock (the "Exchange Ratio") or
(ii) a Stockholder Option, Voting and Proxy Agreement, dated as of
April 29, 1996 (the "Stock Option Agreement") among MFS, Sub and
certain stockholders of UUNET pursuant to which MFS may purchase all
of such stockholders' shares of UUNET common stock held on the date of
exercise of the option for the Exchange Ratio. A copy of the Merger
Agreement is attached as Annex A to the Joint Proxy Statement-
Prospectus accompanying this Notice and a copy of the Stock Option
Agreement is attached as Annex B to the Joint Proxy Statement-
Prospectus accompanying this Notice;
2. To reelect the four Class I Directors to the Board of Directors of MFS
for a three-year term until the 1999 Annual Meeting of Stockholders;
3. To adopt amendments to the MFS 1993 Stock Plan;
4. To adopt amendments to the MFS 1995 Deferred Stock Purchase Plan;
5. To ratify the appointment by the Board of Directors of Coopers &
Lybrand L.L.P. as independent auditors of MFS for the 1996 fiscal
year; and
6. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on ____________,
1996 as the record date for the determination of the holders of MFS Common
Stock, Series A 8% Cumulative Convertible Preferred Stock, par value $.01 per
share ("Series A Preferred") and Series B Cumulative Convertible Preferred
Stock, par value $.01 per share (the "Series B Preferred" and together with the
MFS Common Stock and Series A Preferred, the "MFS Capital Stock") entitled
to notice of, and to vote at, the meeting. Accordingly, only holders of record
of MFS Capital Stock at the close of business on such date will be entitled to
notice of and to vote at the Annual Meeting and any adjournment or postponement
thereof.
The affirmative vote of a majority of votes cast by the holders of the
outstanding shares of MFS Capital Stock, at a meeting at which a quorum is
present, is necessary for the approval of the issuance of the MFS Common Stock
pursuant to the MFS Share Proposal. The four Class I Directors will be elected
by a plurality of the votes cast by holders of MFS Capital Stock present in
person or by proxy and entitled
<PAGE>
to vote at the Annual Meeting. The proposals to amend the MFS 1993 Stock Plan,
to amend the MFS 1995 Deferred Stock Purchase Plan and to ratify the appointment
by the Board of Directors of Coopers & Lybrand L.L.P. as independent auditors of
MFS for the 1996 fiscal year each require the affirmative vote of the holders of
a majority of the votes entitled to be cast in respect of all outstanding shares
of MFS Capital Stock present in person or by proxy at the Annual Meeting and
entitled to vote thereon.
The matters to be considered at the Annual Meeting are more fully described
in the accompanying Joint Proxy Statement-Prospectus, and the annexes thereto,
which form a part of this Notice.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. TO
ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, HOWEVER, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. A
POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER ATTENDING
THE ANNUAL MEETING MAY VOTE IN PERSON EVEN IF THAT STOCKHOLDER HAS RETURNED A
PROXY.
By Order of the Board of Directors
James Q. Crowe
Chairman of the Board
Dated: __________, 1996
<PAGE>
UUNET TECHNOLOGIES, INC.
3060 Williams Drive
Fairfax, Virginia 22031
___________, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
UUNET Technologies, Inc. ("UUNET") to be held at___________a.m. on_____________
___________, _______ 1996 at__________________________.
At the Special Meeting you will be asked to consider a single proposal to
authorize and adopt the Agreement and Plan of Merger, dated as of April 29,
1996, (the "Merger Agreement"), providing for the merger (the "Merger") of a
subsidiary of MFS Communications Company, Inc. ("MFS") with and into UUNET and
to authorize the other transactions contemplated by the Merger Agreement. The
consummation of the Merger will result in, among other things, UUNET becoming a
wholly owned subsidiary of MFS and the issuance and exchange of the outstanding
common stock, par value $.001 per share, of UUNET ("UUNET Common Stock") for
1.777776 newly issued shares of common stock, par value $.01 per share, of MFS
(the "Exchange Ratio") all as more fully described in the accompanying Joint
Proxy Statement-Prospectus.
ADDITIONAL INFORMATION REGARDING THE MERGER AND THE MERGER AGREEMENT IS SET
FORTH IN THE ACCOMPANYING JOINT PROXY STATEMENT-PROSPECTUS AND THE ANNEXES
THERETO, WHICH YOU ARE URGED TO READ CAREFULLY IN THEIR ENTIRETY. PLEASE DO NOT
SEND ANY SHARE CERTIFICATES AT THIS TIME.
The Board of Directors of UUNET has received the opinion, dated as of April
29, 1996, of Goldman, Sachs & Co. that, as of such date and based upon and
subject to certain matters stated therein, the Exchange Ratio was fair to the
holders of UUNET Common Stock.
UUNET'S BOARD OF DIRECTORS HAS CAREFULLY CONSIDERED THE TERMS AND
CONDITIONS OF THE PROPOSED MERGER AND HAS UNANIMOUSLY DETERMINED THAT THE TERMS
OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO,
AND IN THE BEST INTERESTS OF, UUNET AND ITS STOCKHOLDERS. ACCORDINGLY, YOUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE ADOPTION OF THE
MERGER AGREEMENT AND THE AUTHORIZATION OF THE MERGER AND THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT.
As of ________, 1996, the Record Date for the Special Meeting (the "UUNET
Record Date"), certain stockholders of UUNET owned _________ shares of UUNET
Common Stock, or approximately 60.7% of the outstanding UUNET Common Stock. Such
stockholders have sole voting and investment power with respect to all the UUNET
Common Stock held of record by them and have, therefore, sufficient voting
power, without the vote of any other holder of UUNET Common Stock, to determine
the outcome of the vote on the proposal to approve the Merger Agreement and any
related transactions that may come before the Special Meeting. Such stockholders
have advised UUNET that they have granted irrevocable proxies in favor of MFS to
vote all of such stockholders' shares of UUNET Common Stock owned as of the
UUNET Record Date in favor of approval of the Merger Agreement. ACCORDINGLY, BY
VIRTUE OF SUCH STOCKHOLDERS' OWNERSHIP OF 60.7% OF THE OUTSTANDING UUNET COMMON
STOCK, THE PROPOSAL TO ADOPT THE MERGER AGREEMENT WILL BE ADOPTED WITHOUT THE
VOTE OF ANY OTHER STOCKHOLDERS.
<PAGE>
In view of the importance of the action to be taken at this Special Meeting
of UUNET stockholders, we urge you to review carefully the accompanying Notice
of Special Meeting of Stockholders and the Joint Proxy Statement-Prospectus,
including the annexes thereto, which also include information on UUNET and MFS.
Whether or not you expect to attend the Special Meeting, please complete, sign
and date the enclosed proxy and return it to UUNET as promptly as possible.
Very truly yours,
Richard L. Adams, Jr.
Chairman of the Board
<PAGE>
UUNET TECHNOLOGIES, INC.
3060 Williams Drive
Fairfax, Virginia 22031
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held ______________, 1996
-----------------
----------------
To the Stockholders of UUNET Technologies, Inc.:
The Special Meeting of Stockholders of UUNET Technologies, Inc., a Delaware
corporation ("UUNET"), will be held at ____________________, on _______________,
1996 at _____ a.m., for the following purposes:
1. To consider and vote on a single proposal (the "Merger Proposal") to
adopt the Agreement and Plan of Merger, dated as of April 29, 1996 (the "Merger
Agreement"), by and among MFS Communications Company, Inc., a Delaware
corporation ("MFS"), MFS Global Internet Services, Inc., a wholly owned
subsidiary of MFS ("Sub"), and UUNET, providing for the merger (the "Merger") of
Sub with and into UUNET, and to authorize the Merger and the other transactions
contemplated thereby. The consummation of the Merger will result in, among other
things, UUNET becoming a wholly owned subsidiary of MFS and the exchange of
outstanding shares of common stock, par value $.001 per share, of UUNET (the
"UUNET Common Stock") for newly issued shares of common stock, par value $.01
per share, of MFS, all as more fully described in the accompanying Joint Proxy
Statement-Prospectus. A copy of the Merger Agreement is attached as Annex A to
the accompanying Joint Proxy Statement-Prospectus; and
2. To transact such other business as may properly come before the
meeting, or any adjournment or postponement thereof.
The Board of Directors of UUNET has fixed the close of business on
_____________, 1996, as the record date for the determination of the holders of
UUNET Common Stock entitled to notice of, and to vote at, the meeting and
adjournments or postponements thereof. The Merger Proposal requires the
affirmative vote of the holders of a majority of the outstanding shares of UUNET
Common Stock entitled to vote at the meeting.
Information regarding the proposed Merger, the Merger Agreement and related
matters is contained in the accompanying Joint Proxy Statement-Prospectus and
the annexes thereto, which are incorporated by reference herein and form a part
of this Notice.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. TO
ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, HOWEVER, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. A
POSTAGE PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER
ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON EVEN IF THAT STOCKHOLDER HAS
RETURNED A PROXY.
By Order of the Board of Directors
Richard L. Adams, Jr.
Chairman of the Board
Dated: _________, 1996
PLEASE DO NOT SEND ANY SHARE CERTIFICATES AT THIS TIME.
<PAGE>
Subject to Completion May 20, 1996
MFS Communications Company, Inc. UUNET Technologies, Inc.
11808 Miracle Hills Drive 3060 Williams Drive
Omaha, Nebraska 68154 Fairfax, Virginia 22031
(402) 231-3000 (703) 206-5600
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
MFS COMMUNICATIONS COMPANY, INC.
PROXY STATEMENT-PROSPECTUS
________________
UUNET TECHNOLOGIES, INC.
PROXY STATEMENT
This Joint Proxy Statement-Prospectus (the "Joint Proxy Statement-
Prospectus") is being furnished to the holders of common stock, par value $0.001
per share (the "UUNET Common Stock"), of UUNET Technologies, Inc., a Delaware
corporation ("UUNET"), in connection with the solicitation of proxies by the
Board of Directors of UUNET (the "UUNET Board of Directors") for use at a
Special Meeting of Stockholders of UUNET to be held at
______________________________, on __________, [__, 1996], at [10:00] a.m., and
at any and all adjournments or postponements thereof (the "UUNET Special
Meeting").
This Joint Proxy Statement-Prospectus is also being furnished to the
holders of common stock, par value $.01 per share (the "MFS Common Stock"),
Series A 8% Cumulative Convertible Preferred Stock, par value $.01 per share
(the "Series A Preferred") and Series B Cumulative Convertible Preferred Stock,
par value $.01 per share (the "Series B Preferred" and together with the MFS
Common Stock and the Series A Preferred, the "MFS Capital Stock"), of MFS
Communications Company, Inc., a Delaware corporation ("MFS"), in connection with
the solicitation of proxies by the Board of Directors of MFS (the "MFS Board of
Directors") for use at the Annual Meeting of Stockholders of MFS to be held at
____________________, on __________, [_________, 1996], at [10:00] a.m., and at
any and all adjournments or postponements thereof (the "MFS Annual Meeting").
This Joint Proxy Statement-Prospectus relates to the proposed merger (the
"Merger") into UUNET of MFS Global Internet Services, Inc., a wholly owned
subsidiary of MFS ("Sub"), pursuant to the Agreement and Plan of Merger, dated
as of April 29, 1996 (the "Merger Agreement"), among MFS, Sub and UUNET. Upon
consummation of the Merger, UUNET will become a wholly owned subsidiary of MFS.
In the Merger, each outstanding share of UUNET Common Stock (other than shares
owned by UUNET as treasury stock or by its subsidiaries or by MFS or its
subsidiaries, all of which will be canceled) will be converted into and
represent the right to receive 1.777776 shares of MFS Common Stock (the
"Exchange Ratio") and cash in lieu of fractional shares of MFS Common Stock. As
provided for in the Rights Agreement dated as of September 30, 1995, between MFS
and Continental Stock Transfer & Trust Company (the "MFS Rights Plan"), each
share of MFS Common Stock issued in connection with the Merger will be
accompanied by one MFS Right (a "MFS Right") to purchase one one-thousandth of a
share of MFS Series C Preferred, par value $.01 per share. Consummation of
the Merger is subject to various conditions, including the approval of a
majority of the outstanding shares of UUNET Common Stock at the UUNET Special
Meeting and the approval by the affirmative vote of a majority of votes cast by
the holders of the outstanding shares of MFS Capital Stock entitled to vote
thereon, at a meeting at which a quorum is present.
Pursuant to a Stockholder Option, Voting and Proxy Agreement, dated as of
April 29, 1996, among MFS, Sub and certain stockholders of UUNET (the "Stock
Option Agreement"), MFS has been granted an option (the "Option") by certain
stockholders of UUNET to purchase all such stockholders' shares of UUNET Common
Stock held on the date of exercise of the option (______ shares of UUNET Common
Stock as of the UUNET Record Date) for the Exchange Ratio as an alternative to
the issuance of MFS Common Stock in the Merger. The Option may be exercised at
any time following the occurrence of a Purchase Event (as defined in the Merger
Agreement). In addition, pursuant to the Stock Option Agreement, the same
stockholders of UUNET have granted irrevocable
<PAGE>
proxies in favor of MFS to vote all of such stockholders' shares of UUNET Common
Stock as of the UUNET Record Date in favor of the Merger (________ shares of
UUNET Common Stock representing approximately ___% of the outstanding UUNET
Common Stock as of the UUNET Record Date). Such stockholders have sole voting
and investment power with respect to all of the UUNET Common Stock held of
record by them and have, therefore, sufficient voting power, without the vote of
any other holder of UUNET Common Stock, to determine the outcome of the vote on
the proposal to approve the Merger Agreement and any related transactions that
may come before the Special Meeting. ACCORDINGLY, BY VIRTUE OF SUCH
STOCKHOLDERS' OWNERSHIP OF ____% OF THE OUTSTANDING UUNET COMMON STOCK, THE
PROPOSAL TO ADOPT THE MERGER AGREEMENT WILL BE ADOPTED WITHOUT THE VOTE OF ANY
OTHER STOCKHOLDERS.
At the MFS Annual Meeting, holders of the MFS Capital Stock will also be
asked to consider and act upon the following matters: the reelection of four
Class I Directors to the Board of Directors of MFS for a three-year term that
will expire at the 1999 Annual Meeting; amendments to the MFS 1993 Stock Plan;
amendments to the MFS 1995 Deferred Stock Purchase Plan; and the ratification of
the appointment by the MFS Board of Directors of Coopers & Lybrand L.L.P. as
independent auditors of MFS for the 1996 fiscal year.
This Joint Proxy Statement-Prospectus also constitutes the Prospectus of
MFS with respect to an estimated maximum of __________ shares of MFS Common
Stock to be issued in connection with the Merger or, if the Option is exercised,
up to _________ shares of MFS Common Stock in connection with such exercise.
Each share of new MFS Common Stock issued in connection with the Merger will be
accompanied by one MFS Right. MFS Common Stock is traded on Nasdaq Stock
Market's National Market ("Nasdaq") under the symbol "MFST." On _________,
1996, the closing sales price for MFS Common Stock as reported on Nasdaq was
$_______ per share. Holders of UUNET Common Stock are urged to obtain more
recent market information relating to the closing sales price for the MFS Common
Stock.
The Boards of Directors of UUNET, MFS and Sub, and MFS as the holder of all
the outstanding capital stock of Sub have approved the Merger Agreement. THE
UUNET BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT HOLDERS OF UUNET COMMON
STOCK VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. THE MFS BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT HOLDERS OF MFS CAPITAL STOCK VOTE FOR THE
ISSUANCE OF MFS COMMON STOCK PURSUANT TO THE MFS SHARE PROPOSAL. See "THE
MERGER-Interests of Certain Persons in the Merger."
The MFS Board of Directors also recommends that its stockholders reelect
the four Class I directors for a three-year term until the 1999 Annual Meeting
of Stockholders, approve the proposed amendments to the MFS 1993 Stock Plan,
approve the proposed amendments to the MFS 1995 Deferred Stock Purchase Plan and
ratify the appointment by the MFS Board of Directors of Coopers & Lybrand L.L.P.
as independent auditors of MFS for the 1996 fiscal year.
Proxies for the UUNET Special Meeting may be revoked, subject to the
procedures described herein, at any time up to and including the date of the
UUNET Special Meeting. See "THE UUNET SPECIAL MEETING - Record Date;" "-Voting
Rights;" "-Proxies." Proxies for the MFS Annual Meeting may be revoked, subject
to the procedures described herein, at any time up to and including the date of
the MFS Annual Meeting. See "THE MFS ANNUAL MEETING - Record Date;" "-Voting
Rights;" "-Proxies."
SEE "RISK FACTORS" ON PAGES __-__ FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE EVALUATED IN CONNECTION WITH THE MERGER.
All information contained in this Joint Proxy Statement-Prospectus with
respect to UUNET has been provided by UUNET. All information contained in this
Joint Proxy Statement-Prospectus with respect to MFS and Sub has been provided
by MFS.
This Joint Proxy Statement-Prospectus and the accompanying forms of proxy
are first being mailed to stockholders of UUNET and MFS on or about ________,
1996.
<PAGE>
________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT-PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT-PROSPECTUS IS __________, 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION...........................................................
INCORPORATION OF DOCUMENTS BY REFERENCE.........................................
SUMMARY.........................................................................
RISK FACTORS....................................................................
Integration of the Two Companies...............................................
Substantial Dilution of Ownership Interest of Current MFS Stockholders.........
Shares Eligible for Future Sale; Possible Volatility of Stock Price............
The Effect of the Stock Price Fluctuations on the Consideration to be
Received by the Holders of UUNET Common Stock in the Merger....................
Acquisition Strategy...........................................................
Operating Losses...............................................................
Significant Capital Requirements...............................................
Competition....................................................................
Regulation.....................................................................
Risks of Expansion and Implementation..........................................
Rapid Technological Changes; Dependence Upon Product Development...............
Dependence on Key Personnel....................................................
Dependence upon Network Infrastructure; Risk of System Failure; Security Risks.
Variability of Quarterly Operating Results.....................................
UUNET's Reliance on Strategic Relationship with Microsoft......................
UUNET's Dependence upon Suppliers; Sole and Limited Sources of Supply..........
UUNET's Dependence upon New and Uncertain Market...............................
Anti-Takeover Provisions in MFS' Charter and By-laws...........................
THE UUNET SPECIAL MEETING.......................................................
Purpose of the UUNET Special Meeting...........................................
Record Date; Voting Rights; Proxies............................................
Solicitation of Proxies........................................................
Required Vote..................................................................
THE MFS ANNUAL MEETING..........................................................
Purposes of the MFS Annual Meeting.............................................
Record Date; Voting Rights; Proxies............................................
Solicitation of Proxies........................................................
Quorum.........................................................................
Required Vote..................................................................
THE MERGER......................................................................
General........................................................................
Effective Date.................................................................
Conversion of Shares; Procedures for Exchange of Certificates..................
Background to the Merger.......................................................
Recommendation of the Board of Directors of UUNET; Reasons for the Merger......
Interest of Certain Persons in the Merger......................................
Recommendation of MFS Board of Directors of the Merger; Reasons for the Merger.
Opinion of UUNET's Financial Advisor...........................................
Opinion of MFS' Financial Advisor..............................................
Certain Federal Income Tax Consequences........................................
Accounting Treatment...........................................................
Certain Legal Matters..........................................................
Federal Securities Law Consequences............................................
Listing........................................................................
Appraisal Rights...............................................................
Certain Effects of the Stock Option Agreement and Termination Fee..............
THE MERGER AGREEMENT............................................................
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
The Merger.....................................................................
Effective Date.................................................................
Terms of the Merger............................................................
Fractional Shares..............................................................
Surrender and Payment..........................................................
Stock Options and Stock Purchase Plan..........................................
Conditions to Consummation of the Merger.......................................
Representations and Warranties.................................................
Conduct of Business Pending the Merger.........................................
Covenants......................................................................
Effect on Employee Benefit Plans...............................................
No Solicitation................................................................
Indemnification................................................................
Termination; Fees and Expenses.................................................
Amendment; Waiver..............................................................
THE STOCK OPTION AGREEMENT......................................................
Number of Shares; Exercise Price...............................................
Exercise of the Option.........................................................
Adjustment of Number of Shares Subject to Option...............................
Agreement to Vote..............................................................
Grant of Proxy.................................................................
Restrictions on Transfer.......................................................
Certain Federal Income Tax Consequences........................................
MFS VOTING AGREEMENT............................................................
Voting Agreement...............................................................
No Disposition or Encumbrance of Shares and Options............................
Termination....................................................................
BUSINESS OF UUNET...............................................................
SELECTED CONSOLIDATED FINANCIAL DATA OF UUNET...................................
UUNET MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................................................................
BUSINESS OF MFS.................................................................
GLOSSARY........................................................................
COMPARATIVE PER SHARE PRICES....................................................
MFS............................................................................
UUNET..........................................................................
Equivalent Per Share Data......................................................
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS - THE MERGER..............
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - EXERCISE OF OPTION..........
DESCRIPTION OF THE MFS COMMON STOCK.............................................
General........................................................................
Common Stock...................................................................
Preferred Stock................................................................
Preferred Stock Purchase Rights................................................
COMPARISON OF STOCKHOLDER RIGHTS................................................
MANAGEMENT OF UUNET.............................................................
Directors......................................................................
Officers.......................................................................
Employment Arrangements........................................................
SECURITY OWNERSHIP OF MFS.......................................................
Prior to the Merger............................................................
After the Merger...............................................................
SECURITY OWNERSHIP OF UUNET.....................................................
Security Ownership of Certain Beneficial Owners................................
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
MFS REELECTION OF CLASS I DIRECTORS PROPOSAL....................................
Information as to Nominees for Election as Class I Directors...................
Board of Directors' Meetings...................................................
Executive Committee............................................................
Audit Committee................................................................
Compensation Committee.........................................................
Compensation Committee Interlocks and Insider Participation....................
Compliance with Section 16(a) of the Securities Exchange Act...................
Compensation Committee Report..................................................
Executive Compensation.........................................................
Directors' Compensation........................................................
Certain Relationships and Related Transactions.................................
Performance Graph..............................................................
MFS Amendment to Amended and Restated 1993 Stock Plan Proposal..................
Summary of the MFS 1993 Plan...................................................
Summary of Amendments to the MFS 1993 Plan.....................................
Federal Income Tax Consequences................................................
New Plan Benefits..............................................................
MFS AMENDMENT OF 1995 DEFERRED STOCK PURCHASE PLAN PROPOSAL.....................
MFS RATIFICATION OF THE SELECTION OF INDEPENDENT ACCOUNTANTS PROPOSAL...........
OTHER MATTERS...................................................................
LEGAL MATTERS...................................................................
EXPERTS.........................................................................
MFS STOCKHOLDER PROPOSALS.......................................................
</TABLE>
Annex A - Merger Agreement
Annex B - Stock Option Agreement
Annex C - MFS Voting Agreement
Annex D - Opinion of Goldman, Sachs & Co.
Annex E - Opinion of Gleacher NatWest Inc.
- iii -
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT-PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS JOINT PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR THE SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES
OFFERED BY THIS JOINT PROXY STATEMENT-PROSPECTUS, OR THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER, OR PROXY SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT-PROSPECTUS NOR
THE ISSUANCE OR SALE OF ANY SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH HEREIN SINCE THE DATE HEREOF OR INCORPORATED BY REFERENCE HEREIN SINCE THE
DATE HEREOF.
AVAILABLE INFORMATION
UUNET and MFS are subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance
therewith file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and may be available at the
following Regional Offices of the Commission: Midwest Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and New
York Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such materials can be obtained at prescribed rates from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. In addition, material filed by each of UUNET and
MFS can be inspected at the offices of the National Association of Securities
Dealers, Inc., at 1735 K Street, N.W., Washington, D.C. 20006.
This Joint Proxy Statement-Prospectus does not contain all the information
set forth in the Registration Statement on Form S-4 and exhibits relating
thereto, including any amendments (the "Registration Statement"), of which this
Joint Proxy Statement-Prospectus is a part, and which MFS has filed with the
Commission under the Securities Act of 1933, as amended (the "Securities Act").
Reference is made to such Registration Statement for further information with
respect to MFS and the securities of MFS offered hereby. Statements contained
herein concerning the provisions of documents are necessarily summaries of such
documents, and each statement is qualified in its entirety by reference to the
copy of the applicable document filed with the Commission or attached as an
annex hereto. The information in this Joint Proxy Statement-Prospectus
concerning UUNET and MFS has been furnished by UUNET and MFS, respectively.
INCORPORATION OF DOCUMENTS BY REFERENCE
MFS hereby incorporates by reference into this Joint Proxy Statement-
Prospectus the following documents previously filed with the Commission pursuant
to the Exchange Act:
1. MFS' Annual Report on Form 10-K for the year ended December 31, 1995 as
amended by MFS' Form 10-K/A;
2. The description of MFS Common Stock contained in MFS' Registration
Statement on Form 8-A (File No. 0-21594) filed with the Commission pursuant to
Section 12(g) of the Exchange Act on April 21, 1993, as amended by Amendment No.
1 filed with the Commission on a Form 8 on May 10, 1993, and any amendment or
report filed for the purpose of updating any such description;
3. MFS' Reports on Form 8-K dated January 23, 1996, April 30, 1996 and May
10, 1996; and
4. MFS' Quarterly Report on Form 10-Q for the quarter ended March 31,
1996.
<PAGE>
In addition, all reports and other documents filed by MFS pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the MFS Annual Meeting or the UUNET Special Meeting shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing of such reports and documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Joint Proxy Statement-
Prospectus to the extent that a statement contained herein, or in any other
subsequently filed document that also is incorporated or deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Joint Proxy Statement-
Prospectus.
THIS JOINT PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
FILED BY MFS WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE
DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE,
UPON WRITTEN OR ORAL REQUEST FROM ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM THIS JOINT PROXY STATEMENT-PROSPECTUS IS DELIVERED, FROM MFS COMMUNICATIONS
COMPANY, INC., 11808 MIRACLE HILLS DRIVE, OMAHA, NEBRASKA 68154, ATTENTION:
SECRETARY (TEL. (402) 231-3000). IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY _________, 1996.
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<PAGE>
SUMMARY
The following summary is intended only to highlight certain information
contained elsewhere in this Joint Proxy Statement-Prospectus and the Annexes
hereto. This summary is not intended to be complete and is qualified in its
entirety by the more detailed information contained elsewhere or incorporated by
reference in this Joint Proxy Statement-Prospectus. Stockholders of UUNET and
MFS should read carefully this Joint Proxy Statement-Prospectus in its entirety.
Certain capitalized terms used in this summary are defined elsewhere in this
Joint Proxy Statement-Prospectus, including the Glossary.
THE COMPANIES
UUNET. UUNET Technologies, Inc. ("UUNET") is a leading worldwide provider
of a comprehensive range of Internet access options, applications, and
consulting services to businesses, professionals and on-line services providers.
UUNET provides both dedicated and dial-up Internet access, and other
applications and services which include Web server hosting and integration
services, client software and security products, training, and network
integration and consulting services. UUNET estimates that its current customer
base includes over 22,000 business and professional accounts.
UUNET makes available to customers a variety of products and services,
including Web server hosting and content development services, client software
and security products and training, all of which can be integrated by UUNET
through its network integration and consulting services, through a single
source. UUNET's products and services are supported by a technical staff that
is highly experienced in Internet operations and services. UUNET's network
operations center monitors traffic across UUNET's network 24 hours per day,
seven days a week.
UUNET's network infrastructure, following the acquisition of Unipalm Group
plc ("Unipalm"), of a 40 percent interest in EUnet Deutschland GmbH ("EUnet
Germany") and of an additional 31 percent interest in UUNET Canada, Inc. ("UUNET
Canada"), allowed local access to users in 543 POPs, including 288 outside of
the United States as of April 1, 1996. UUNET plans to continue to expand its
network to allow local access to users in numerous additional cities worldwide.
UUNET's network infrastructure includes a high capacity frame relay-based
network backbone comprised primarily of 45 Mbps, DS-3 leased lines in the United
States and fractional DS-3 leased lines internationally. UUNET is expanding and
enhancing its network infrastructure which is designed to be scaleable to meet
increased user demand.
UUNET's network infrastructure is based on its own 45 Mbps, DS-3 leased
line, frame relay-based network of Cascade switches supporting Cisco 7000
routers. This network infrastructure enables customers to access the Internet
through dedicated lines or by placing a local telephone call (dial-up) through a
modem to the nearest UUNET POP. Once connected, the customer's traffic is
routed though UUNET's network infrastructure to the desired Internet location,
whether on UUNET's network or elsewhere on the Internet.
UUNET continues to upgrade its network infrastructure in response
to the increase in the number of customers purchasing UUNET's Internet access
services, particularly UUNET's high speed T-1 and T-3 access options. UUNET
believes that this network infrastructure provides the higher bandwidth,
increased throughput and reliability, capacity and a geographic coverage UUNET
believes is required by businesses and professionals using the Internet at a
lower per unit cost than its previous infrastructure.
UUNET has a strategic relationship with Microsoft Corporation ("Microsoft")
in which UUNET is developing, operating and maintaining a large-scale, high
speed, dial-up and ISDN TCP/IP access network as part of its overall network
infrastructure. This network is the primary Internet dial-up network and
infrastructure for Microsoft, including The Microsoft Network. The Microsoft
relationship provides UUNET with the opportunity to accelerate the expansion of
the capacity and geographic coverage of its network infrastructure both
domestically and internationally.
-3-
<PAGE>
UUNET initiated a major international expansion in 1995, which included
establishing international gateway hubs in 13 countries and building facilities
to allow local access to users in nine cities in Europe, seven cities in Canada,
two cities in Asia, and one city in Australia. In addition, UUNET acquired
Unipalm, the largest Internet services provider in Europe and the largest
Internet access provider in the United Kingdom. In December 1995, UUNET agreed
to acquire 40 percent of the equity of EUnet Germany, a leading Internet
services provider in Germany; the acquisition closed in February 1996. In
addition, in January 1996, UUNET agreed to increase its equity ownership of
UUNET Canada to 51 percent, which acquisition closed in April 1996. This
expansion plan capitalizes on the opportunity to build network infrastructure
for The Microsoft Network, while providing significant capacity for UUNET to
utilize for its other customers.
UUNET intends to continue the international expansion begun in 1995 by
pursuing several avenues, including acquiring other Internet service providers
and complementary businesses and technologies in various target countries and
obtaining international telecommunications facilities, including significant
undersea and European terrestrial fiber optic cable capacity.
As used in this Joint Proxy Statement-Prospectus, the term "UUNET" refers
to UUNET Technologies, Inc. and its subsidiaries, unless the context otherwise
requires. The principal executive offices of UUNET are located at 3060 Williams
Drive, Fairfax, Virginia 22031; its telephone number is (703) 206-5600. Its
Internet address is investor-relations @uu.net or www.uu.net.
MFS. MFS Communications Company, Inc. ("MFS") provides facilities-based
telecommunications services and systems to business and government. MFS
believes business and government users have distinct telecommunications service
requirements, including maximum reliability, consistent high quality, capacity
for high-speed data transmission, responsive customer service and continuous
attention to service enhancement and new service development. MFS believes it
has significant advantages over its competitors as a result of MFS': (i) focus
on business and government end users; (ii) expertise in developing highly
reliable, advanced digital fiber optic networks which offer substantial
transmission capacity; (iii) centralized, real-time network monitoring and
control provided by MFS' advanced network operations control centers; (iv)
emphasis on providing comprehensive and responsive customer service; (v)
economic benefits derived from being a national and international multi-service
provider; (vi) ongoing development of new services, such as integrated local and
long distance switched services and data transmission services which improve
the quality of, enhance the performance of, or reduce the cost of,
telecommunications services for business and government end users; (vii)
deployment of its networks in key domestic and international business markets to
take advantage of regulatory changes that permit greater competition in the
local market; and (viii) international network platform that serves customers
with multiple offices in key business centers.
MFS is organized as a holding company and operates through its subsidiaries
in two business segments: (i) telecommunications services; and (ii) network
systems integration. MFS provides telecommunications services domestically and
internationally in the form of: (i) dedicated special access and private line
circuits, local switched service and high speed data communications to large
business customers; (ii) single source integrated local and long distance
switched services, high speed data communications services and facilities
management to medium and small businesses; (iii) local access to long distance
companies; and (iv) local access, ATM-based backbone service and interconnection
via Network Access Points ("NAPs") to Internet service providers.
MFS provides telecommunications services by utilizing its international
network platform, which consists of MFS owned transmission and switching
facilities and network capacity leased from other carriers primarily in the
United States and Western Europe. The MFS owned portion of the international
network platform consists of metropolitan area networks of fiber optic cables,
integrated local and long distance switches, advanced electronics, ATM switching
equipment, transmission equipment and associated wiring and equipment. In
addition, MFS has ownership interests in several international submarine cables.
The metropolitan area networks are generally linked to each other with leased
high capacity fiber optic lines. MFS provides international service through
several means, including leasing submarine cable capacity from international
carriers as well as taking ownership interests and obtaining indefeasible rights
of use capacity on other submarine cables. On May 7, 1996, MFS announced that it
intends to build or acquire its own U.S. and international inter-metropolitan
area and transoceanic fiber optic networks, to be deployed over a four year
period to connect its metropolitan networks.
The fiber optic cable utilized in MFS' networks typically contain from
12 to 144 fiber strands, each of which is capable of providing multiple
telecommunications channels or "circuits." Depending on transmission
-4-
<PAGE>
electronics, a single pair of glass fibers on MFS' networks currently can
transmit 32,256 or more simultaneous voice conversations, whereas a typical pair
of copper wires generally can carry a maximum of 24 simultaneous voice
conversations. Although local exchange carriers (the "LECs") and foreign
telecommunications carriers have historically used copper wire in their
networks, they currently are deploying fiber optic cable to supplement or
upgrade portions of their copper-based networks, particularly in areas served by
MFS. MFS expects that continuing developments in telecommunications equipment
will increase the capacity of each optical fiber, thereby providing even greater
capacity at relatively low incremental cost.
MFS' subsidiary, MFS Global Network Services, Inc. ("Global Network
Services") manages the operation and development of MFS' networks. MFS Global
Network Services contracts with another MFS subsidiary, MFS Network
Technologies, Inc. ("MFS Network Technologies") which engineers and manages the
construction of the fiber optic network. As each portion of the network is
completed, MFS Global Network Services manages the operation of the network.
Over time, MFS' network evolved from "islands" of advanced fiber optic networks
within individual metropolitan areas, to an integrated international network
platform consisting of fiber optic cables either owned or leased by MFS,
integrated local and long distance switches, advanced electronics, ATM switching
equipment, transmission equipment and associated wiring and equipment.
MFS also plays a major role in making the Internet available to users
internationally through sales of dedicated circuits for local access and high
bandwidth-based backbone service to Internet service providers. MFS is also one
of several companies that manage the operation of NAPs, through which
significant amounts of traffic on the Internet pass. MFS developed and manages
NAPs that are in operation and known as MAE East in Washington, D.C., MAE West
in San Jose, California and MAE Chicago in Chicago, Illinois. Additional NAPs
are under development.
Initially created to design and build MFS' networks in a high quality
and cost-effective manner, MFS Network Technologies, as a network system
integrator, also provides development, design and engineering, project
management, construction and support of networks and systems to a range of
third-party customers. It is an industry leader in the creation of advanced
communication and transportation systems, through the integration of advanced
technologies for telecommunications, transportation and security applications.
As used in this Joint Proxy Statement-Prospectus, the term "MFS" refers to
MFS Communications Company, Inc. and its subsidiaries, unless the context
otherwise requires. The principal executive offices of MFS are located at 11808
Miracle Hills Drive, Omaha, Nebraska 68154; its telephone number is (402) 231-
3000.
THE MEETINGS
Times, Places and Dates
A Special Meeting of the stockholders of UUNET will be held at
__________________, on __________, __, 1996, at [10:00] a.m., local time
(including any and all adjournments or postponements thereof, the "UUNET Special
Meeting").
The Annual Meeting of the stockholders of MFS will be held at the
_________________, on __________, __, 1996 at [10:00] a.m., local time
(including any and all adjournments or postponements thereof, the "MFS Annual
Meeting").
Purposes of the Meetings
At the UUNET Special Meeting, holders of UUNET Common Stock will consider
and vote upon a proposal to approve and adopt an Agreement and Plan of Merger,
dated as of April 29, 1996, among UUNET, MFS and Sub, a copy of which is
attached as Annex A to this Joint Proxy Statement-Prospectus, providing for the
Merger of Sub with and into UUNET. As a result of the Merger, UUNET will become
a wholly owned subsidiary of MFS. In the Merger, each outstanding share of
UUNET Common Stock will be converted into and represent the right to receive
1.777776 shares of MFS Common Stock. Each share of MFS Common Stock issued in
connection
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<PAGE>
with the Merger will be accompanied by one MFS Right. Stockholders of UUNET will
also consider and vote upon any other matter that may properly come before the
meeting.
At the MFS Annual Meeting, holders of MFS Capital Stock, will consider and
vote upon the issuance of shares of MFS Common Stock pursuant to either the
Merger Agreement or the Stock Option Agreement (the "MFS Share Proposal"). At
the MFS Annual Meeting, holders of MFS Capital Stock will also be asked to
consider and act upon the following matters: the reelection of four Class I
Directors to the Board of Directors of MFS for a three-year term until the 1999
Annual Meeting; amendments to the MFS 1993 Stock Plan; amendments to the MFS
1995 Deferred Stock Purchase Plan; and the ratification of the appointment by
the MFS Board of Directors of Coopers & Lybrand L.L.P. as independent auditors
of MFS for the 1996 fiscal year. See "MFS REELECTION OF CLASS I DIRECTORS
PROPOSAL," "MFS AMENDMENT TO AMENDED AND RESTATED 1993 STOCK PLAN PROPOSAL,"
"MFS AMENDMENT TO 1995 DEFERRED STOCK PURCHASE PLAN (AMENDED AND RESTATED AUGUST
28, 1995) PROPOSAL" and "MFS RATIFICATION OF THE SELECTION OF INDEPENDENT
ACCOUNTANTS PROPOSAL," respectively. Holders of MFS Capital Stock will also
consider and vote upon any other matter that may properly come before the
meeting.
Votes Required; Record Dates
Approval and adoption of the Merger Agreement requires the affirmative vote
of the holders of a majority of the outstanding shares of UUNET Common Stock
entitled to vote thereon. Holders of UUNET Common Stock are entitled to one vote
per share. Only holders of UUNET Common Stock at the close of business on
_________, 1996 (the "UUNET Record Date") will be entitled to notice of and to
vote at the UUNET Special Meeting. On ________, 1996 there were __________
shares of UUNET Common Stock outstanding and entitled to vote. Pursuant to the
Stock Option Agreement certain stockholders of UUNET have granted irrevocable
proxies in favor of MFS to vote all of such stockholders' shares of UUNET Common
Stock as of the UUNET Record Date in favor of the Merger (________ shares of
UUNET Common Stock representing approximately ____% of the outstanding UUNET
Common Stock as of the UUNET Record Date). See "THE UUNET SPECIAL MEETING" and
"THE STOCK OPTION AGREEMENT."
The MFS Share Proposal will require approval by the affirmative vote of a
majority of votes cast by the holders of the outstanding shares of MFS Capital
Stock, at a meeting at which a quorum is present. As of the Record Date, there
were __________ shares of MFS Common Stock outstanding, ____ shares of the
Series A Preferred outstanding and shares of Series B Preferred outstanding.
Each share of Common Stock is entitled to one vote per share, each share of
Series A Preferred is entitled to ten votes per share, and each share of Series
B Preferred is entitled to ten votes on each matter to be voted upon at the
Annual Meeting. The shares of Series B Preferred, however, are held subject to
an irrevocable proxy that has been granted to the Secretary and Assistant
Secretary of MFS to vote all shares of Series B Preferred on all matters, other
than the election of MFS directors and matters as to which the holders of the
Series B Preferred vote as a separate class, in proportion to the vote of the
holders of the MFS Common Stock. The MFS Share Proposal, the amendments to the
MFS 1993 Stock Plan, the amendments to the MFS 1995 Deferred Stock Purchase Plan
and the ratification of Coopers & Lybrand L.L.P. as independent auditors of MFS
for the 1996 fiscal year do not require a separate class vote by the holders of
the Series B Preferred. Only holders of MFS Capital Stock at the close of
business on __________, 1996 (the "MFS Record Date") will be entitled to notice
of and to vote at the MFS Annual Meeting. Pursuant to the MFS Voting Agreement
(defined below), certain MFS stockholders, all of whom are Directors of MFS,
have granted irrevocable proxies in favor of UUNET to vote all of such
stockholders' shares of MFS Common Stock as of the MFS Record Date in favor of
the MFS Share Proposal (_______ shares of MFS Common Stock representing
approximately ____% of the outstanding MFS Common Stock and approximately ____%
of the voting power of the MFS Capital Stock as of the MFS Record Date). See
"THE MFS ANNUAL MEETING" and the "MFS VOTING AGREEMENT."
-6-
<PAGE>
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Boards of Directors of UUNET and MFS believe that the terms of the
Merger are fair to and in the best interests of their respective stockholders
and have by the unanimous vote of all directors present approved the Merger
Agreement and the related transactions. The UUNET Board of Directors
unanimously recommends that its stockholders approve and adopt the Merger
Agreement, and the MFS Board of Directors unanimously recommends that its
stockholders approve the MFS Share Proposal. See "THE MERGER-Background of the
Merger," "-Recommendation of the Board of Directors of UUNET; Reasons for the
Merger," "-Recommendation of the Board of Directors of MFS; Reasons for the
Merger" and "-Interests of Certain Persons in the Merger."
The MFS Board of Directors also recommends that its stockholders reelect
the four Class I Directors to the MFS Board of Directors for a three-year term
until the 1999 Annual Meeting of Stockholders, to approve the proposed
amendments to the MFS 1993 Stock Plan, to approve the proposed amendments to the
MFS 1995 Deferred Stock Purchase Plan and to ratify the appointment by the MFS
Board of Directors of Coopers & Lybrand L.L.P. as independent auditors of MFS
for the 1996 fiscal year. See "MFS REELECTION OF CLASS I DIRECTORS PROPOSAL,"
"MFS AMENDMENT TO AMENDED AND RESTATED 1993 STOCK PLAN PROPOSAL," "MFS AMENDMENT
TO 1995 DEFERRED STOCK PURCHASE PLAN (AMENDED AND RESTATED AUGUST 28, 1995)
PROPOSAL," and "MFS RATIFICATION OF THE SELECTION OF INDEPENDENT ACCOUNTANTS
PROPOSAL," respectively.
THE MERGER
Merger Consideration
On the effective date of the Merger (the "Effective Date"), each
outstanding share of UUNET Common Stock (other than shares owned by UUNET or its
subsidiaries and MFS or its subsidiaries, all of which will be canceled) will be
automatically converted (subject to certain provisions described herein with
respect to fractional shares) into and represent the right to receive 1.777776
shares of MFS Common Stock. Each share of MFS Common Stock issued in connection
with the Merger will be accompanied by one MFS Right. No fractional shares will
be issued. Upon consummation of the Merger, Sub will be merged with and into
UUNET and UUNET, as the surviving corporation in the Merger, will become a
wholly owned subsidiary of MFS. See "THE MERGER AGREEMENT-Terms of the Merger."
Conditions to the Merger; Termination
The obligations of UUNET and MFS to consummate the Merger are subject to
various conditions, including, but not limited to: (i) obtaining requisite
stockholder and governmental approvals; (ii) the absence of any preliminary or
permanent injunction or other order by any federal or state court which prevents
the consummation of the Merger; (iii) approval for listing on Nasdaq, subject to
official notice of issuance, of the MFS Common Stock to be issued in connection
with Merger; (iv) receipt of opinions of counsel at the closing of the Merger in
respect of certain federal income tax consequences of the Merger; and (v) the
receipt of any required third party consents. See "THE MERGER AGREEMENT-
Conditions to Consummation of the Merger."
The Merger Agreement may be terminated at any time prior to the Effective
Date, whether before or after approval of the matters presented in connection
with the Merger by the stockholders of UUNET: (i) by mutual consent of the
Boards of Directors of UUNET and MFS; (ii) by either MFS or UUNET if the Merger
has not been consummated on or before November 30, 1996; (iii) by UUNET if any
of the conditions to its obligation to consummate the Merger have not been met
or waived by UUNET at such time as such condition is no longer capable of
satisfaction; (iv) by MFS if any of the conditions to its obligation to
consummate the Merger have not been met or waived by MFS at such time as such
condition is no longer capable of satisfaction; (v) by MFS in the event of a
Purchase Event (defined in this Joint Proxy Statement-Prospectus under the
caption "THE STOCK OPTION AGREEMENT - Exercise of the Option"), (vi) by either
MFS or UUNET, if the approval of UUNET's stockholders of the Merger is not
obtained at the UUNET Special Meeting; or (vii) by either MFS or UUNET if the
approval of MFS' stockholders to the MFS Share Proposal is not obtained at the
MFS Annual Meeting.
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<PAGE>
If the Merger Agreement is terminated by MFS because of a failure by the
UUNET stockholders to approve the Merger, the failure of UUNET to perform in all
material respects its agreements contained in the Merger Agreement on or prior
to the Effective Date or the failure of the representations and warranties of
UUNET contained in the Merger Agreement to be true in all material respects when
made and on and as of the Effective Date as if made on and as of such date,
except to the extent they relate to a particular date, and within 18 months
after the date of such termination, UUNET accepts or recommends to its
stockholders for approval an Acquisition Proposal (as defined in the Merger
Agreement) that MFS believes would result in a transaction more favorable to
UUNET's stockholders than the Merger and such Acquisition Proposal is
consummated, UUNET is obligated to pay MFS a fee of $60 million. If the Merger
Agreement is terminated by UUNET because of a failure by the MFS stockholders to
approve the MFS Share Proposal, the failure of MFS or Sub to perform in all
material respects their agreements contained in the Merger Agreement on or prior
to the Effective Date or the failure of the representations and warranties of
MFS or Sub contained in the Merger Agreement to be true in all material respects
when made and on and as of the Effective Date as if made on and as of such date,
except to the extent they relate to a particular date, MFS is obligated to pay
UUNET a fee of $60 million and, at UUNET's option, to purchase 1,551,724 shares
of newly issued UUNET Common Stock for $90 million, and, at UUNET's option, to
provide a maximum of $100 million of certain data communications services to
UUNET at MFS' cost over five years. Certain aspects of these termination fees
could have the effect of discouraging a third party from pursuing an acquisition
transaction involving UUNET. See "THE MERGER AGREEMENT-Certain Effects of the
Stock Option Agreement," "-No Solicitation" and "-Termination Fee."
Listing
It is a condition to the Merger that the shares of MFS Common Stock to be
issued in the Merger be authorized for listing on Nasdaq, subject to official
notice of issuance.
Governmental Approvals Required
Certain aspects of the Merger will require notifications to, and/or
approvals from, certain federal authorities, including the expiration or
termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended. See "THE MERGER-Certain Legal Matters."
Accounting Treatment
The Merger will be accounted for as a purchase for accounting and financial
reporting purposes. See "THE MERGER-Accounting Treatment."
Appraisal Rights
Under Delaware law, the holders of UUNET Common Stock and MFS Capital Stock
are not entitled to any appraisal rights in connection with the Merger. See
"THE MERGER-Appraisal Rights."
Stock Option Agreement
As a condition to entering into the Merger Agreement, MFS required certain
stockholders of UUNET to enter into the Stock Option Agreement pursuant to which
such stockholders (i) agreed to vote their shares of UUNET Common Stock in favor
of the approval of the Merger Agreement and against any proposal for any
recapitalization, merger (other than the Merger), sale of assets or other
business combination between UUNET and any person or entity (other than MFS or
Sub) or any other action or agreement that would result in a breach of the
Merger Agreement or result in any conditions of the Merger Agreement not being
fulfilled, (ii) granted irrevocable proxies in favor of MFS and Sub to so vote
their shares, and (iii) issued to MFS an Option to purchase, all of such
stockholders' shares of UUNET Common stock held on the UUNET Record Date and the
date of exercise of the Option (equal to approximately ____% or _______ shares,
of the issued and outstanding shares of UUNET Common Stock as of the UUNET
Record Date) for the Exchange Ratio. The Option may only be exercised upon the
occurrence of certain events, which generally relate to, or are designed to
culminate in, the acquisition of control of, or a significant equity interest in
or significant assets of, UUNET by a third party. Certain aspects of the Stock
Option Agreement could have the effect of discouraging a third party from
pursuing an acquisition transaction involving UUNET. See "THE MERGER-Certain
Effects of the Stock Option Agreement and Termination Fee" and "THE STOCK OPTION
AGREEMENT."
-8-
<PAGE>
MFS Voting Agreement
As a condition to entering into the Merger Agreement, UUNET required
certain MFS stockholders, all of whom are Directors of MFS, to enter into the
Parent Voting and Proxy Agreement, dated as of April 29, 1996 (the "MFS Voting
Agreement"), pursuant to which such MFS stockholders granted irrevocable proxies
in favor of UUNET to vote all of such stockholders' shares of MFS Common Stock
held as of the MFS Record Date in favor of the MFS Share Proposal. As of the
MFS Record Date, the number of shares of MFS Common Stock subject to the
irrevocable proxies equals approximately ____% of the issued and outstanding
shares of MFS Common Stock and approximately ____% of the voting power of the
MFS Capital Stock. A copy of the MFS Voting Agreement is attached to this Joint
Proxy Statement-Prospectus as Annex C. See "THE MFS VOTING AGREEMENT."
OPINIONS OF FINANCIAL ADVISORS
UUNET
Goldman, Sachs & Co. ("Goldman Sachs") delivered its written opinion to the
UUNET Board of Directors to the effect that as of April 29, 1996, the Exchange
Ratio pursuant to the Merger Agreement was fair to holders of the UUNET Common
Stock.
The full text of the written opinion of Goldman Sachs, which sets forth
assumptions made, matters considered and limitations on the review undertaken in
connection with the opinion, is attached hereto as Annex D and is incorporated
herein by reference. HOLDERS OF UUNET COMMON STOCK ARE URGED TO, AND SHOULD,
READ SUCH OPINION IN ITS ENTIRETY. See "THE MERGER-Opinion of UUNET's
Financial Advisor."
MFS
Gleacher NatWest Inc. ("Gleacher NatWest") delivered its written opinion to
the MFS Board of Directors that as of April 29, 1996, and based upon and subject
to certain matters stated in its opinion, the Exchange Ratio offered by MFS to
the UUNET stockholders pursuant to the Merger is fair from a financial point of
view to MFS and its stockholders.
The full text of the written opinion of Gleacher NatWest, which sets forth
assumptions made, matters considered and limitations on the review undertaken in
connection with the opinion, is attached hereto as Annex E and is incorporated
herein by reference. HOLDERS OF MFS CAPITAL STOCK ARE URGED TO, AND SHOULD,
READ SUCH OPINION IN ITS ENTIRETY. See "THE MERGER-Opinion of MFS' Financial
Advisor."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the UUNET Board of Directors with
respect to the Merger Agreement and the transactions contemplated thereby, UUNET
stockholders should be aware that certain members of UUNET's management and the
UUNET Board of Directors have certain interests in the Merger that are in
addition to the interests of stockholders of UUNET generally. These interests
arise from, among other things, certain employee benefit plans, indemnification
and insurance arrangements and other matters which MFS will assume or has agreed
to provide after the Merger. In addition, MFS has agreed to appoint to the MFS
Board of Directors John W. Sidgmore, President, Chief Executive Officer and a
director of UUNET, Richard L. Adams, Jr., Chairman of the Board of UUNET, and a
third individual designated by UUNET and approved by MFS, subject to the
consummation of the Merger. See "THE MERGER-Interests of Certain Persons in the
Merger."
RISK FACTORS
Holders of UUNET Common Stock, in voting on the Merger, and holders of MFS
Capital Stock, in voting on the MFS Share Proposal, should consider among other
factors the following: (i) the difficulty of integration of the two companies;
(ii) substantial dilution of ownership interest of current MFS stockholders;
(iii) the effect of stock price fluctuations on consideration paid to UUNET
stockholders (iv) the potential effect of shares eligible for
-9-
<PAGE>
future sales; (v) the risks of the combined company's acquisition strategy; (vi)
operating losses; (vii) significant capital requirements; (viii) competition;
(ix) regulation; (x) risks of expansion and implementation; (xi) rapid
technological changes; (xii) dependence on key personnel; (xiii) dependence upon
network infrastructure; (xiv) variability of quarterly operating results; (xv)
UUNET's reliance upon its relationship with Microsoft; (xvi) UUNET's dependence
upon sole and limited sources of supply; (xvii) UUNET's dependence upon a new
and uncertain market; (xviii) tax net operating loss carryforwards; and (xix)
MFS' charter and by-laws anti-takeover provisions. See "RISK FACTORS."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Merger is conditioned upon the delivery of opinions of
counsel dated as of the closing date of the Merger to the effect that the Merger
will constitute a "reorganization" within the meaning of Section 368 of the
Internal Revenue Code of 1986 (the "Code"). See "THE MERGER-Certain Federal
Income Tax Consequences." Accordingly, except as more fully described under "THE
MERGER--Certain Federal Income Tax Consequences," no gain or loss will be
recognized by UUNET stockholders as a result of the Merger except with respect
to cash received in lieu of fractional shares and no gain or loss will be
recognized by MFS, UUNET, or Sub as a result of the Merger.
THE MFS COMMON STOCK
There are 400,000,000 shares of MFS Common Stock authorized, of which, as
of April 26, 1996, there were 125,804,234 shares outstanding, an additional
22,114,274 shares issuable upon exercise of outstanding options and an
additional _______ shares issuable upon conversion of the outstanding shares of
both the Series A Preferred and the Series B Preferred. It is anticipated that
on the Effective Date, approximately ___________ shares of MFS Common Stock will
be issued to the holders of UUNET Common Stock, and an additional __________
shares of MFS Common Stock will be issuable upon the exercise of options which
were previously exercisable for shares of UUNET Common Stock. Such shares will
represent approximately ____% of the outstanding MFS Common Stock after such
issuance. The MFS Common Stock trades on Nasdaq under the symbol "MFST." See
"DESCRIPTION OF THE MFS COMMON STOCK."
COMPARATIVE RIGHTS OF STOCKHOLDERS
The rights of UUNET stockholders currently are governed by Delaware law,
UUNET's Certificate of Incorporation and UUNET's By-laws. Upon consummation of
the Merger, stockholders of UUNET will become stockholders of MFS, which is also
a Delaware corporation, and their rights as stockholders of MFS will be governed
by Delaware law, MFS' Amended & Restated Certificate of Incorporation, as
amended, and MFS' By-laws. For a comparison of the rights of UUNET stockholders
and the rights of MFS stockholders, see "COMPARISON OF STOCKHOLDER RIGHTS."
COMPARATIVE PER SHARE PRICES
MFS
The MFS Common Stock trades on Nasdaq under the symbol "MFST." The
following table sets forth the high and low sale prices of the MFS Common Stock
as reported by Nasdaq for each of the quarters in the two year period ended
December 31, 1995 and for the first quarter of 1996, which prices give effect to
a 2-for-1 stock split which was payable on April 26, 1996.
1994 High Low
---- ---- ---
First Quarter $20.625 $14.000
Second Quarter 17.000 10.250
Third Quarter 18.375 12.250
Fourth Quarter 20.750 16.250
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<PAGE>
1995
----
First Quarter $19.500 $15.375
Second Quarter 18.625 14.375
Third Quarter 24.500 15.875
Fourth Quarter 26.875 19.125
1996
----
First Quarter $ 34.00 $28.875
Second Quarter (to ___, 1996)
On April 29, 1996, the last sales price of the MFS Common Stock on Nasdaq
was $34.625. The public announcement of the Merger Agreement occurred prior to
the opening of trading on April 30, 1996.
UUNET
Since May 25, 1995, the UUNET Common Stock has traded on Nasdaq under the
symbol "UUNT." The following table sets forth the high and low sale prices of
the UUNET Common Stock as reported by Nasdaq for each of the quarters in the
period ended December 31, 1995 and for the first quarter of 1996.
1995 High Low
---- ---- ---
Second Quarter $28.500 $21.750
Third Quarter 51.750 27.250
Fourth Quarter 98.750 38.750
1996 High Low
---- ---- ---
First Quarter $62.500 $25.000
Second Quarter (to ____, 1996)
On April 29, 1996, the last sales price of the UUNET Common Stock on Nasdaq
was $48.250. The public announcement of the Merger Agreement occurred prior to
the opening of trading on April 30, 1996.
EQUIVALENT PER SHARE DATA
The following tables set forth certain data concerning the historical book
value per share, cash dividends declared per share and income (loss) per share
from continuing operations for MFS and UUNET, respectively, on a pro forma basis
after giving effect to the Merger and on a pro forma basis after giving effect
to the exercise of the Option. The pro forma combined data are presented for
comparative purposes only and are not necessarily indicative of what the actual
financial position and results of operations would have been as of and for the
periods ended December 31, 1995 and March 31, 1996 had the Merger or exercise of
the Option been consummated nor does such data purport to represent results for
future periods. The information should be read in conjunction with the unaudited
Pro Forma Consolidated Condensed Financial Statements of MFS contained elsewhere
in this Joint Proxy Statement-Prospectus, the historical financial statements of
MFS incorporated herein by reference and the historical financial statements of
UUNET contained elsewhere herein. The unaudited pro forma equivalent per share
data shows for each share of MFS Common Stock and UUNET Common Stock before the
Merger and the exercise of the Option, its equivalent position after giving
effect to the Merger and the exercise of the Option. UUNET stockholders will
receive 1.777776 shares of MFS Common Stock for each share of UUNET Common Stock
outstanding.
<TABLE>
<CAPTION>
Historical
Three Months Ended Year Ended
March 31, 1996 December 31, 1995
------------------- -----------------
MFS UUNET MFS UUNET
------- ------ ------- ------
<S> <C> <C> <C> <C>
</TABLE>
-11-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Book value per share.................... $ 6.01 $ 2.55 $ 6.67 $ 2.52
Cash dividends per share................ - - - -
Income (loss) per share from
continuing operations.................. (0.75) 0.01 (2.21) (0.63)
</TABLE>
MFS - Pro Forma
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1996 December 31, 1995
------------------- -----------------
Merger Option Merger Option
------- ------ ------- ------
<S> <C> <C> <C> <C>
Book value per share.................... $15.62 $12.33 $16.13 $12.88
Cash dividends per share................ - - - -
Income (loss) per share from
continuing operations.................. (1.09) (0.97) (3.92) (3.33)
</TABLE>
UUNET - Pro Forma Equivalents
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1996 December 31, 1995
------------------- -----------------
Merger Option Merger Option
------- ------ ------- ------
<S> <C> <C> <C> <C>
Book value per share.................... $27.77 $21.91 $28.67 $22.90
Cash dividends per share................ - - - -
Income (loss) per share from
continuing operations.................. (1.94) (1.72) (6.97) (5.92)
</TABLE>
SURRENDER OF STOCK CERTIFICATES
On the Effective Date, MFS will instruct Continental Stock Transfer & Trust
Company, in its capacity as exchange agent for the Merger (the "Exchange
Agent"), to mail to each holder of record of UUNET Common
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<PAGE>
Stock a transmittal letter within three business days. The transmittal letter
will contain instructions with respect to the surrender of certificates
representing UUNET Common Stock to be exchanged for MFS Common Stock. See "THE
MERGER-CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES."
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<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
UUNET HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
THE FOLLOWING TABLE SETS FORTH SUMMARY HISTORICAL CONSOLIDATED FINANCIAL
INFORMATION OF UUNET AND HAS BEEN DERIVED FROM AND SHOULD BE READ IN CONJUNCTION
WITH UUNET'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, WHICH ARE
INCLUDED IN THIS JOINT PROXY STATEMENT-PROSPECTUS. UNAUDITED INTERIM DATA
REFLECT, IN THE OPINION OF UUNET'S MANAGEMENT, ALL ADJUSTMENTS (CONSISTING ONLY
OF NORMAL RECURRING ADJUSTMENTS) CONSIDERED NECESSARY FOR A FAIR PRESENTATION OF
RESULTS FOR SUCH INTERIM PERIODS. RESULTS OF OPERATIONS FOR UNAUDITED INTERIM
PERIODS ARE NOT NECESSARILY INDICATIVE OF RESULTS WHICH MAY BE EXPECTED FOR ANY
OTHER INTERIM OR ANNUAL PERIOD.
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Years Ended December 31,
------------------- ----------------------------------------------------------
March 31,
-------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data(1):
Revenues................................ $43,013 $ 15,020 $ 94,461 $33,138 $24,019 $20,396 $14,180
Income (loss) from operations........... 371 (391) (20,543)(2) (8,226) (1,329) 1,602 1,826
Net income (loss)....................... 233 (280) (18,257)(2) (7,988) (2,026) 1,074 1,298
Pro forma net income (loss) per common and
equivalent share (3)................... 0.01 (0.01) (0.63)(2) (0.35)
Shares used in computing pro forma net
income (loss) per share amounts (3).... 33,436 25,774 28,987 22,946
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
--------- --------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data(1):
Cash and cash equivalents............... $ 45,413 $ 60,424 $10,493 $ 857 $ 280 $ 776
Working capital......................... 17,789 38,335 4,270 (1,499) (584) (874)
Total assets............................ 156,278 137,610 29,625 10,585 8,285 6,499
Notes payable, net of current portion... 18,045 13,686 1,196 634 774 696
Redeemable convertible preferred stock.. - - 14,073 2,676 200 -
Total stockholders' equity (4).......... 82,084 80,667 279 425 2,567 1,191
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Years Ended December 31,
----------------------- ----------------------------------------------------------
March 31,
-----------------------
1996 1995 1995 1994 1993 1992 1991
------- -------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Other Financial Data:
EBITDA(5)......................... $ 4,319 $ 634 $ (1,154) $(6,075) $ (120) $ 2,509 $ 2,376
</TABLE>
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<PAGE>
(1) UUNET acquired Unipalm in November 1995 in a transaction that was accounted
for as a pooling of interests and, as such, all financial amounts contained
in this table and the accompanying Consolidated Financial Statements have
been restated to include the financial results and data of Unipalm for all
periods presented. Unipalm previously had an April 30 fiscal year-end. In
order to conform Unipalm's fiscal year-end to UUNET's calendar year-end, the
statement of operations data for the years ended December 31, 1991, 1992 and
1993 reflect the statement of operations of Unipalm for the fiscal years
ended April 30, 1992, 1993 and 1994, respectively. The consolidated
statement of operations data for the year ended December 31, 1993 includes
the four month period ended April 30, 1994 which is also included in the
consolidated statement of operations data for the year ended December 31,
1994. The consolidated balance sheet data as of December 31, 1991, 1992 and
1993, includes the balance sheet data of Unipalm as of April 30, 1992, 1993
and 1994, respectively. See Note 1 of Notes to UUNET's Consolidated
Financial Statements for amounts included in more than one period.
(2) Reflects the incurrence of acquisition-related costs of $11.1 million during
the fourth quarter of 1995 in connection with the acquisition of Unipalm.
(3) See Note 1 of Notes to UUNET's Consolidated Financial Statements for an
explanation of the determination of the number of shares and share
equivalents used in computing pro forma per share amounts.
(4) UUNET was an S corporation for federal and state income tax purposes through
September 1992. UUNET paid cash dividends to its stockholders in 1991 and
1992 sufficient for its stockholders to pay income taxes on UUNET's taxable
income. UUNET, on a consolidated basis, has not declared any dividends
since 1994. Dividends declared and paid by UUNET on a consolidated basis
were $33,000 ($0.01 per share) in 1991, $587,000 ($0.08 per share) in 1992,
and $129,000 ($0.01 per share) in 1994.
(5) Represents earnings (loss) before depreciation and amortization, interest
and income tax (expense) benefit. UUNET has included information concerning
EBITDA because it understands that such information is used by certain
investors as one measure of an issuer's operating performance. EBITDA is not
determined in accordance with generally accepted accounting principles
("GAAP"), is not indicative of cash used by operating activities and should
not be considered in isolation or as a substitute for measures of
performance determined in accordance with GAAP. For the year ended December
31, 1995, EBITDA excludes acquisition-related costs of approximately $11.1
million incurred in connection with the acquisition of Unipalm.
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<PAGE>
MFS Historical Consolidated Financial Information
The following selected consolidated data should be read in conjunction with
the MFS Consolidated Financial Statements and the notes thereto incorporated by
reference herein.
The selected consolidated financial data for each of the years in the
period 1991 to 1995 have been derived from audited historical consolidated
financial statements. The selected consolidated financial data presented below
as of and for the three months ended March 31, 1995 and 1996, have been derived
from unaudited consolidated financial statements of MFS. In the opinion of MFS'
management, the unaudited financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments, which consist only of normal recurring adjustments, necessary for a
fair presentation of the financial position and the results of operations for
these periods. Operating results for the three months ended March 31, 1996 are
not necessarily indicative of the results that may be expected for the full
year.
The development and acquisition by MFS of its networks and services
during the periods reflected in the MFS Historical Consolidated Financial
Information materially affect the comparability of that data from one period to
another.
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<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, December 31,
------------------ -------------------------------------------------------------
1996 1995 1995 1994(1) 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: (dollars in thousand, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Telecommunications services $165,590 $103,788 $498,225 $228,707 $70,048 $47,585 $23,158
Network systems integration 20,726 14,552 84,969 58,040 71,063 61,122 14,065
---------- ---------- ----------- ---------- ---------- --------- -------
Total 186,316 118,340 583,194 286,747 141,111 108,707 37,223
Costs and expenses:
Operating expenses 174,173 119,882 562,300 273,431 102,905 76,667 33,963
Depreciation and amortization 44,609 29,073 142,496 73,869 34,670 20,544 11,761
General and administrative expense 34,892 25,941 117,703 75,576 34,989 23,267 18,429
---------- ---------- ----------- ---------- ---------- --------- -------
Total 253,674 174,896 822,499 422,876 172,564 120,478 64,153
---------- ---------- ----------- ---------- ---------- --------- -------
Loss from operations (67,358) (56,556) (239,305) (136,129) (31,453) (11,771) (26,930)
Other income (expense) net (18,766) (7,252) (27,993) (17,175) 8,464 (792) (1,314)
---------- ---------- ----------- ---------- ---------- --------- -------
Loss before income taxes (86,124) (63,808) (267,298) (153,304) (22,989) (12,563) (28,244)
Income tax benefit (expense) (100) (100) (600) 2,103 7,220 (566) -
---------- ---------- ----------- ---------- ---------- --------- -------
Net loss (86,224) (63,908) (267,898) (151,201) (15,769) (13,129) (28,244)
Dividends on preferred stock (7,072) - (15,064) - - - -
---------- ---------- ----------- ---------- ---------- --------- -------
Net loss applicable to common
stockholders ($93,296) ($63,908) ($282,962) ($151,201) ($15,769) ($13,129) ($28,244)
========== ========== =========== ========== ========== ========= =======
Loss per share applicable to common
stockholders(2),(4) ($0.75) ($0.50) ($2.21) ($1.21) ($0.15) ($0.15)
========== ========== =========== ========== ========== =========
Number of shares(2),(4) 125,017,000 128,729,000 127,786,000 124,874,000 105,764,000 88,170,000
========== ========== =========== ========== ========== =========
BALANCE SHEET AND OTHER DATA:
EBITDA(3) ($19,408) ($27,483) ($96,809) ($62,260) $3,217 $8,773 ($15,169)
Capital expenditures, including
acquisitions of businesses,
net of cash acquired 153,294 114,426 523,727 576,711 128,651 110,171 92,411
Networks and equipment 1,466,254 897,920 1,315,952 787,453 370,334 243,243 159,751
Total assets 2,347,211 1,554,945 1,867,134 1,584,546 906,937 363,299 204,819
Long-term obligations, less current
maturities 1,286,354 560,688 723,471 548,333 143 169 7,659
Stockholders' equity 754,582 719,610 830,332 770,103 811,105 298,516 162,538
</TABLE>
(1) Reflects the acquisition of Centex Telemanagement, Inc. as of May 18, 1994,
Cylix Communications Corporation as of November 1, 1994 and RealCom Office
Communications, Inc. as of November 14, 1994.
(2) See Note 2 to the MFS Consolidated Financial Statements, incorporated
herein by reference, which describes the calculation of loss per share.
(3) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization and non cash stock-based compensation. EBITDA is
commonly used in the communications industry to analyze companies on the
basis of operating performance. EBITDA is not intended to represent cash
flows for the periods. See the MFS Consolidated Statements of Cash Flows.
(4) Reflects the 2-for-1 stock split that was effected on April 26, 1996.
<PAGE>
MFS Pro Forma Consolidated Financial Information
The following unaudited pro forma consolidated condensed financial data
under the columns captioned "Merger" give effect to the Merger pursuant to the
Merger Agreement. The pro forma balance sheet data under the columns captioned
"Merger" assume that the Merger occurred on March 31, 1996. The pro forma
statement of operations data under the columns captioned "Merger" assume that
the Merger occurred as of January 1, 1995. The following unaudited pro forma
consolidated condensed financial data under the columns captioned "Option" give
effect to the exercise of the Option to purchase ___________ shares of UUNET
Common Stock (representing approximately ___% of the outstanding shares of UUNET
Common Stock outstanding at the UUNET Record Date) by MFS pursuant to the Stock
Option Agreement. The pro forma balance sheet data under the columns captioned
"Option" assume that the exercise of the Option occurred on March 31, 1996. The
pro forma statement of operations data under the columns captioned "Option"
assume that the exercise of the Option occurred as of January 1, 1995. The pro
forma consolidated condensed financial statements are not necessarily indicative
of the results that actually would have been attained if the Merger or the
exercise of the Option had been in effect on the dates indicated or which may be
attained in the future. Such statements should be read in conjunction with the
MFS and UUNET historical consolidated financial statements and notes thereto
incorporated by reference or included herein.
-18-
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA: Merger Option
--------------------------------------------- ---------------------------------------------
Three Months Year Ended Three Months Year Ended
Ended March 31, 1996 December 31, 1995 Ended March 31, 1996 December 31, 1995
<S> <C> <C> <C> <C>
(dollars in thousands, except per share data)
Revenue............................ $ 228,007 $ 671,810 $ 228,007 $ 671,810
Costs and expenses:
Operating expenses................ 208,419 639,361 208,419 639,361
Depreciation and amortization..... 154,464 574,446 110,905 400,211
General and administrative
expenses......................... 38,018 130,412 38,018 130,412
Other............................. -- 11,067 -- 11,067
------------ ------------ ------------ ------------
400,901 1,355,286 357,342 1,181,051
------------ ------------ ------------ ------------
Loss from operations............... (172,894) (683,476) (129,335) (509,241)
Other income (expense):
Interest income................... 6,221 15,935 6,221 15,935
Interest expense.................. (23,955) (39,414) (23,955) (39,414)
Other............................. (1,170) (2,702) (1,259) 4,236
------------ ------------ ------------ ------------
Total other income (expense).... (18,904) (26,181) (18,993) (19,243)
------------ ------------ ------------ ------------
Loss before income taxes........... (191,798) (709,657) (148,328) (528,484)
Income tax expense................. (100) (600) (100) (600)
------------ ------------ ------------ ------------
Net loss........................... (191,898) (710,257) (148,428) (529,084)
Dividends on preferred stock....... (7,072) (15,064) (7,072) (15,064)
------------ ------------ ------------ ------------
Loss applicable to
common stockholders............... $ (198,970) $ (725,321) $ (155,500) $ (544,148)
============ ============ ============ ============
Weighted average number of shares
outstanding....................... 182,265,000 185,034,000 160,511,000 163,280,000
============ ============ ============ ============
Pro forma net loss per share
applicable
to common stockholders............ $(1.09) $(3.92) $(0.97) $(3.33)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: Merger Option
-------------------- --------------------
March 31, 1996 March 31, 1996
-------------------- --------------------
(dollars in thousands)
<S> <C> <C>
Total assets....................... $4,537,298 $3,698,168
Long-term obligations less
current maturities................ 1,273,301 1,273,301
Stockholders' equity............... 2,856,075 1,985,753
</TABLE>
-19-
<PAGE>
RISK FACTORS
Holders of UUNET Common Stock and holders of MFS Capital Stock should
consider carefully all of the information contained in this Joint Proxy
Statement-Prospectus, including the following factors:
RISKS RELATED TO THE MERGER
INTEGRATION OF THE TWO COMPANIES
UUNET and MFS have entered into the Merger Agreement with the expectation
that the Merger will result in certain benefits. Achieving the benefits of the
Merger will depend in part upon the integration of the businesses of UUNET and
MFS in an efficient manner, and there can be no assurance that this will occur.
The transition to a combined company will require substantial attention from
management. Neither company's management has experience in integrating
operations on the scale represented by the Merger. The diversion of management
attention and any difficulties encountered in the transition process could have
an adverse impact on the revenues and operating results of the combined company.
In addition, the process of combining the two organizations could cause the
interruption of, or a disruption in, the activities of either or both of the
companies' businesses, which could have a material adverse effect on their
combined operations. There can be no assurance that the combined company will
realize any of the anticipated benefits of the Merger.
SUBSTANTIAL DILUTION OF OWNERSHIP INTEREST OF CURRENT MFS STOCKHOLDERS
Following the Merger, the current stockholders of MFS will own
approximately __% of the outstanding shares of MFS Common Stock. This
represents substantial dilution of the ownership interest in MFS of the current
MFS stockholders.
THE EFFECT OF STOCK PRICE FLUCTUATIONS ON THE CONSIDERATION TO BE RECEIVED BY
THE HOLDERS OF UUNET COMMON STOCK IN THE MERGER
The relative stock prices of the UUNET Common Stock and the MFS Common
Stock at the Effective Date may vary significantly from the prices as of the
date of execution of the Merger Agreement or the date hereof or the date on
which stockholders vote on the Merger. These variances may be due to changes in
the business, operations and prospects of UUNET or MFS, market assessments of
the likelihood that the Merger will be consummated and the timing thereof, the
effect of any conditions or restrictions imposed on or proposed with respect to
the combined companies by regulatory agencies in connection with or following
consummation of the Merger, general market and economic conditions, and other
factors. The Exchange Ratio is fixed and will not be adjusted based on changes
in the relative stock prices of the UUNET Common Stock and the MFS Common Stock.
Thus, the dollar value of the MFS Common Stock to be received by the holders of
UUNET Common Stock will not be determined until the Effective Date, and may be
substantially more or less than the value of the MFS Common Stock as of the date
of execution of the Merger Agreement, the date hereof or the date on which
stockholders vote on the Merger.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE VOLATILITY OF STOCK PRICE
After the Merger, approximately ___________ of the MFS shares issued to
UUNET stockholders will be freely tradeable and an additional ___________ shares
will be tradeable under Rule 145 under the Securities Act. As a result,
substantial sales of MFS Common Stock could occur after the Merger. Sales of a
substantial number of such shares of MFS Common Stock could adversely affect or
cause substantial fluctuations in the market price of MFS Common Stock and
impair MFS' ability to raise additional capital through the sale of its equity
securities. As of the MFS Record Date, MFS had outstanding under the MFS 1992
Stock Plan and the MFS 1993 Stock Plan options to purchase approximately
__________ shares of MFS Common Stock. In addition, as of the MFS Record Date,
warrants to purchase 1,500,000 shares of MFS Common Stock were outstanding. As
of the Record Date, UUNET has outstanding ____________ vested options, which
upon consummation of the Merger will convert to options to purchase _______
shares of MFS Common Stock.
The market price for the MFS Common Stock is subject to significant
fluctuations in response to a number of factors, including variations in MFS'
quarterly operating results, changes in estimates of MFS' results of operations,
perceptions about market conditions in the telecommunications industry and the
effect of general economic conditions, many of which are unrelated to MFS'
operating performance. Since the announcement of the Merger Agreement, the
market price of MFS Common Stock has been subject to significant fluctuation in
response to factors affecting UUNET and the Internet industry. In addition, the
stock market generally has experienced significant price and volume
fluctuations. These market fluctuations could have a material adverse effect on
the market price or liquidity of the MFS Common Stock.
RISKS RELATED TO MFS, UUNET AND THE COMBINED COMPANY
ACQUISITION STRATEGY
Both MFS and UUNET have acquired complementary businesses as part of their
business strategies. UUNET is in the process of integrating certain of the
operations, research and development, sales and marketing, finance and
administrative functions of Unipalm and UUNET Canada. In addition, UUNET has
recently acquired 40 percent of the equity ownership of EUnet Germany and has
increased its ownership interest in UUNET Canada to 51%.
After the Merger, it is likely that the combined company will continue to
acquire complementary businesses, and any future acquisitions will be
accompanied by the risks commonly associated with acquisitions.
-20-
<PAGE>
These risks include potential exposure to unknown liabilities of acquired
companies or to acquisition costs and expenses, the difficulty and expense of
integrating the operations and personnel of the companies, the potential
disruption to the business of the combined company and potential diversion of
management time and attention, the impairment of relationships with and the
possible loss of key employees and customers as a result of changes in
management, incurring amortization expenses if an acquisition is accounted for
as a purchase and dilution to the stockholders of the combined company if the
acquisition is made for stock of the combined company. There can be no assurance
that products, technologies or businesses of acquired companies will be
effectively assimilated into the business or product offerings of the combined
company. In addition, the combined company may incur significant expense to
complete acquisitions and to support the acquired products and businesses. There
can be no assurance that any acquired products, technologies or businesses will
contribute to the combined company's revenues or earnings to any material
extent. Further, the challenge of managing the integration of future
acquisitions may distract management and may interfere with the successful
integration of MFS and UUNET.
OPERATING LOSSES
The development of MFS' businesses, the installation and expansion of its
domestic and international networks and the recently proposed linking of these
networks through the acquisition or construction of facilities require
significant expenditures, a substantial portion of which is incurred before the
realization of revenues. These expenditures, together with the associated up
front operating expenses, result in negative cash flow until an adequate
customer base is established. MFS reported losses from operations of
approximately $31.5 million, $136.1 million and $239.3 million for the three
years ended December 31, 1993, 1994 and 1995, respectively, and $67.4 million
for the three months ended March 31, 1996. Although its revenues have increased
substantially in each of the last three years and for the three months ended
March 31, 1996, MFS has incurred significant increases in expenses associated
with the development and expansion of its fiber optic networks, services and
customer base, which expenses are expected to continue for the foreseeable
future.
At March 31, 1996, UUNET had an accumulated deficit on a consolidated basis
of approximately $27.3 million. UUNET reported net losses on a consolidated
basis of approximately $2.0 million, $8.0 million and $18.3 million for the
years ended December 31, 1993, 1994 and 1995, respectively, and net income on a
consolidated basis of approximately $0.2 million for the quarter ended March 31,
1996. There can be no assurance that UUNET will be able to maintain
profitability. UUNET is expanding the network and organizational infrastructure
and increasing the marketing and advertising efforts and expense necessary to
expand its Internet access services domestically and internationally, and there
can be no assurance that UUNET will report operating profits in the future.
There can be no assurance that the combined company will achieve or sustain
profitability in the future.
SIGNIFICANT CAPITAL REQUIREMENTS
Expansion of MFS' existing networks and services and the development of new
networks and services require significant capital expenditures. During the
first quarter of 1996, MFS' capital expenditures, which are primarily for the
construction of networks and the purchase of related equipment, were $153
million, including acquisitions and deferred costs. On May 7, 1996, MFS
announced that it intends to undertake certain initiatives designed to take
advantage of opportunities created by changes in telecommunications laws and the
rapid development of Internet technology-based communications networks. These
initiatives involve increasing the number of cities served, expanding its
networks in existing cities, constructing or acquiring its own intercity high
capacity network, accelerating central office interconnection, deploying
additional switches, and providing high-speed local Internet access.
Expenditures for the initiatives are subject to MFS' review of a number of
factors including cost of any additional capital required, technological
developments and market conditions. In addition, each initiative may be
implemented in whole or in part, and independently of any other initiative,
ensuring that MFS retains maximum financial and operating flexibility. MFS
anticipates that implementation of these initiatives will result in an increase
in annual capital expenditures of approximately $500 million which, together
with currently anticipated expenditures, is expected to bring total capital
expenditures to approximately $1 billion per year over the period of
implementation which MFS estimates to be four years. This estimate is subject to
a number of factors, including pace and extent of network development, levels of
incremental sales, as well as regulatory
-21-
<PAGE>
actions by state, federal and international authorities, which, individually or
in the aggregate, could cause material changes in capital expenditure
requirements.
UUNET will also require additional financing to continue with its plan to
accelerate international expansion (including obtaining significant undersea and
European terrestrial fiber optic cable capacity), make strategic acquisitions of
other Internet service providers or complementary businesses, technologies or
products to develop new products or otherwise respond to unanticipated
competitive pressures. The combined company expects to fund additional capital
requirements through additional debt or equity financing, existing resources and
internally generated funds as appropriate. There can be no assurance, however,
that the combined company will be successful in producing sufficient cash flow
or raising sufficient debt or equity capital on terms that it will consider
acceptable. Failure to generate or raise sufficient funds may require the
combined company to delay or abandon some of its future expansion or
expenditures of MFS or UUNET, which could have a material adverse effect on the
growth of the combined company.
COMPETITION
MFS
Virtually all markets for telecommunications services, including Internet
access and on-line services, are extremely competitive, and UUNET and MFS expect
that competition will intensify in the future. In each of the markets in which
it offers telecommunications services, MFS faces significant competition from
larger, better financed incumbent providers. MFS competes, both domestically
and internationally, with incumbent LECs, which have historically dominated
their local telecommunications markets, and long distance carriers, for the
provision of long distance services. In certain markets, especially
international markets, the incumbent provider offers both local and long
distance services. The LECs presently have numerous advantages as a result of
their historic monopoly control of the local exchange market. A continuing
trend toward business combinations and alliances in the telecommunications
industry may create significant new larger competitors to MFS. Many of MFS'
existing and potential competitors have financial, personnel and other resources
significantly greater than those of MFS. MFS also faces competition in most
markets in which it operates from one or more competitors, including competitive
access providers ("CAPs") operating fiber optic networks, in some cases in
conjunction with the local cable television operator. Each of AT&T Corp.
("AT&T"), MCI Communications Corporation ("MCI") and Sprint Corporation
("Sprint") has indicated its intention to offer local telecommunications
services in major U.S. markets using its own facilities or by resale of the
LECs' or others' services. Other potential competitors include cable television
companies, wireless telephone companies, electric utilities, microwave carriers
and private networks of large end users. In addition, MFS competes with
equipment vendors and installers and telecommunications management companies
with respect to certain portions of its business.
Under the Telecommunications Act of 1996 (the "Telecom Act") and ensuing
federal and state regulatory initiatives, barriers to local exchange competition
are being removed. The introduction of such competition, however, also
establishes the predicate for the Bell Operating Companies (the "BOCs") to
provide in-region interexchange long distance services. The BOCs are currently
allowed to offer certain "incidental" long distance service in-region and to
offer out-of-region long distance services. Once the BOCs are allowed to offer
in-region long distance services, both they and the three largest long distance
carriers (AT&T, MCI and Sprint) will be in a position to offer single source
local and long distance service similar to that being offered by MFS.
-22-
<PAGE>
MFS competes in three international markets: international services from
the United States; international services from certain countries in continental
Europe and Hong Kong; and domestic services within, and international services
from, the United Kingdom and Sweden. MFS offers private line, high-speed LAN
interconnect data and voice services in each of these markets, subject to
varying governmental authorizations. MFS faces competition in international
service originating in the United States from, among others, AT&T, MCI, Sprint
and WorldCom, Inc., which conducts business under the name "LDDS WorldCom"
("WorldCom"). These companies own significant international transmission
capacity and have established operating agreements with governmental and private
telecommunications providers in Europe, Asia and elsewhere, which greatly reduce
their cost of providing service. In international markets, MFS competes with
the incumbent telecommunications carrier, which generally offers both local and
long distance services and benefits from its history as an incumbent provider.
MFS Network Technologies' primary network systems integration competitors
are the BOCs, long distance carriers, equipment manufacturers and major
independent telephone companies. In certain circumstances, MFS Network
Technologies may also compete with regional and local systems integration and
construction firms for integration and installation projects. In the automatic
vehicle identification market, MFS Network Technologies competes with specific
manufacturers and several of the aerospace defense contractors that have
indicated an intention to shift to commercial markets.
UUNET
The market for data communications services, including Internet access and
on-line services, is extremely competitive. There are no substantial barriers
to entry, and UUNET expects that competition will intensify in the future. UUNET
believes that its ability to compete successfully depends on a number of
factors, including market presence; the ability to execute a strategy of rapid
expansion; the capacity, reliability and security of its network infrastructure;
ease of access to and navigation of the Internet; the pricing policies of its
competitors and suppliers; the timing of the introduction of new products and
services by UUNET and its competitors; UUNET's ability to support industry
standards; and industry and general economic trends. UUNET's success in this
market will depend heavily upon its ability to provide high quality Internet
connectivity and value-added Internet services at competitive prices.
UUNET's current and potential competitors headquartered in the United
States generally may be divided into the following three groups: (1)
telecommunications companies, such as AT&T, MCI, Sprint, WorldCom, BOCs and
@Home (a joint venture between Tele-Communications, Inc. and a venture capital
firm) and various other cable companies; (2) other Internet access providers,
such as BBN Corporation ("BBN"), NETCOM On-Line Communication Services, Inc.
("NETCOM"), PSINet Inc. ("PSI"), and other national and regional providers; and
(3) on-line services providers, such as America Online, Inc. ("America Online"),
CompuServe Corporation ("CompuServe"), Intuit Inc., Microsoft, and Prodigy. Many
of these competitors have greater market presence, engineering and marketing
capabilities, and financial, technological and personnel resources than those
available to UUNET. As a result, they may be able to develop and expand their
communications and network infrastructures more quickly, adapt more swiftly to
new or emerging technologies and changes in customer requirements, take
advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their services than can UUNET.
UUNET expects that all of the major on-line services providers and
telecommunications companies will expand their current services to compete fully
in the Internet access market. UUNET believes that new competitors, including
large computer hardware, software, media and other technology and
telecommunications companies will enter the Internet access market, resulting in
even greater competition for UUNET. Certain companies, including America Online,
AT&T, BBN and PSI, have obtained or expanded their Internet access products and
services as a result of acquisitions and strategic investments. Such
acquisitions may permit UUNET's competitors to devote greater resources to the
development and marketing of new competitive products and services and the
marketing of existing competitive products and services. MFS and UUNET expect
these acquisitions and strategic investments to increase, thus creating
significant new larger competitors to MFS and UUNET. In addition, the ability of
some of UUNET's competitors to bundle other
-23-
<PAGE>
services and products with Internet access services, such as the Internet
service offerings recently announced by AT&T and MCI, could place UUNET at a
competitive disadvantage.
As UUNET continues to expand its operations outside of the United States,
it will encounter competition from companies whose operating styles are
substantially different from those that it usually experiences. UUNET will be
forced to compete with and buy services from government owned or subsidized
telecommunications providers, some of which may enjoy an absolute monopoly on
telecommunications services essential to UUNET's business. For example, in the
United Kingdom, UUNET's Unipalm subsidiary competes directly with: (1)
telecommunications companies, such as British Telecommunications plc ("BT"),
Cable and Wireless plc ("Cable and Wireless"), Mercury Communications Limited
("Mercury") and others; (2) other Internet access providers, such as Demon
Internet Limited ("Demon") and EUnet GB Limited ("EUnet GB"); and (3) on-line
services providers, such as CompuServe, America Online/Bertelsmann, Microsoft
and AT&T. In addition to the risks ascribed to UUNET's previously described
competitors, these foreign competitors may possess a better understanding of
their local markets and may have better working relationships with local
telecommunications companies. There can be no assurance that UUNET can obtain
similar levels of local knowledge and failure to obtain that knowledge could
place UUNET at a serious competitive disadvantage.
As a result of increased competition in the industry, UUNET expects to
continue to encounter significant pricing pressure, which in turn could result
in significant reductions in the average selling price of UUNET's services. For
example, certain of UUNET's competitors which are telecommunications companies,
including AT&T and MCI, provide customers with low priced or free Internet
access services in connection with the purchase of telephone or other
communications services, significantly increasing price pressures on UUNET.
UUNET has in the past reduced prices on certain of its Internet access options
and may do so in the future. There can be no assurance that UUNET will be able
to offset the effects of any such price reductions with an increase in the
number of its customers, higher revenue from enhanced services, cost reductions
or otherwise. In addition, UUNET believes that the data communications business,
and in particular the Internet access and on-line services businesses, are
likely to encounter consolidation in the near future, which could result in
increased price and other competition in the industry. Increased price or other
competition could result in erosion of UUNET's market share and could have a
material adverse effect on UUNET's business, financial condition and results of
operations. There can be no assurance that UUNET will have the financial
resources, technical expertise, marketing and support capabilities or expansion
and acquisition possibilities to continue to compete successfully.
REGULATION
MFS
MFS is subject to varying degrees of federal, state, local and
international regulation. In the United States, MFS is most heavily regulated by
the states, especially for the provision of local exchange services. MFS must be
separately certified in each state to offer local exchange services. No state,
however, subjects MFS to price cap or rate of return regulation, nor is MFS
currently required to obtain FCC authorization for installation or operation of
its network facilities used for domestic services. FCC approval is required,
however, for the installation and operation of its international facilities and
services. Both the states and the FCC have determined that nondominant carriers,
such as MFS, are required to file interstate tariffs on an ongoing basis,
setting forth MFS' rates and operating procedures. Challenges to these tariffs
by third parties may cause MFS to incur substantial legal and administrative
expenses. The FCC has initiated a rulemaking to eliminate this requirement for
all nondominant carriers. In addition, MFS is subject to varying degrees of
regulation in the foreign jurisdictions in which it conducts operations
including authorization for the installation and operation of its network
facilities. Although the trend in federal, state and international regulation
appears to favor increased competition, no assurance can be given that changes
in current or future regulations adopted by the FCC, state or foreign regulators
or legislative initiatives in the United States and abroad would not have a
material adverse effect on MFS.
-24-
<PAGE>
UUNET
UUNET is not currently subject to direct regulation by the FCC or any other
U.S. agency, other than regulation applicable to businesses generally. The FCC
recently requested comments on a petition filed by the America's Carriers
Telecommunication Association which requests that the FCC regulate certain
voice transmissions over the Internet as telecommunications services. Changes in
the regulatory environment relating to the telecommunications or Internet access
industry, could have an adverse effect on UUNET's business. The Telecom Act may
permit telecommunications companies, BOCs or others to increase the scope or
reduce the cost of their Internet access services. UUNET cannot predict the
effect that the Telecom Act or any future legislation, regulation or regulatory
changes may have on its business.
The law in the United States relating to the liability of on-line services
providers and Internet access providers for information carried on, disseminated
through or hosted on their systems is currently unsettled. Several private
lawsuits seeking to impose such liability are currently pending. In one case
brought against an Internet access provider, Religious Technology Center v.
Netcom On-Line Communication Services, Inc., the United States District Court
for the Northern District of California ruled in a preliminary phase that under
certain circumstances Internet access providers could be held liable for
copyright infringement. The case has not reached final judgment. Recently
enacted federal legislation prohibits and imposes liability for using an
interactive computer service for transmitting certain types of information and
content. In addition, numerous states have adopted or are currently considering
similar types of legislation. The imposition upon UUNET and other Internet
access providers or Web hosting sites of potential liability for materials
carried on or disseminated through their systems could require UUNET to
implement measures to reduce its exposure to such liability, which may require
the expenditure of substantial resources or the discontinuation of certain
product or service offerings. UUNET believes that it is currently unsettled
whether the Telecom Act prohibits and imposes liability for any services
provided by UUNET should the content or information transmitted be subject to
the statute. The increased attention focused upon liability issues as a result
of these lawsuits, legislation and legislative proposals could impact the growth
of Internet use. While UUNET carries insurance, it may not be adequate to
compensate UUNET in the event UUNET becomes liable for information carried on or
disseminated through its systems. Any costs not covered by insurance incurred as
a result of such liability or asserted liability could have a material adverse
effect on UUNET's business, financial condition and results of operations.
The law relating to the liability of on-line services providers and
Internet access providers in relation to information carried, disseminated or
hosted also is being developed in the United Kingdom and other jurisdictions.
The scope of authority of various regulatory bodies in relation to on-line
services is at present uncertain. The Office of Telecommunications in the United
Kingdom has recently published a consultative document setting out a number of
issues for discussion, including the roles of traditional telecommunications and
broadcasting regulators with respect to on-line services. The Securities
Investment Board is investigating the status of on-line services and the
transmission of investment information over networks controlled by access
providers. Such transmissions may make the access provider concerned liable for
any infringement of securities and other financial services legislation and
regulations. Decisions regarding regulation, enforcement, content liability and
the availability of Internet access in other countries may significantly affect
the ability to offer certain services worldwide and the development and
profitability of companies offering Internet and on-line services in the future.
For example, CompuServe recently removed certain content from its services
worldwide in reaction to law enforcement activities in Germany, and it has been
reported that an Internet access provider in Germany has been advised by
prosecutors that it may have liability for disseminating neo-Nazi writings by
providing access to the Internet where these materials are available.
RISKS OF EXPANSION AND IMPLEMENTATION
MFS
MFS is engaged in the expansion and development of its networks and
services. The expansion and development of its networks will depend on, among
other things, its ability to assess markets, design fiber optic network backbone
routes, install facilities and obtain rights-of-way, building access and any
required government authorizations and/or permits, all in a timely manner, at
reasonable costs and on satisfactory terms and conditions.
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As a result, there can be no assurance that MFS will be able to expand its
existing networks or install new networks. If MFS is not able to expand its
networks or install or acquire new networks, there will be a material adverse
effect on its growth.
Foreign operations or investment may be adversely affected by local
political and economic developments, exchange controls, currency fluctuations,
royalty and tax increases, retroactive tax claims, expropriation, import and
export regulations and other foreign laws or policies as well as by laws and
policies of the United States affecting foreign trade, taxation and investment.
In addition, in the event of a dispute arising from foreign operations, MFS may
be subject to the exclusive jurisdiction of foreign courts or may not be
successful in subjecting foreign persons to the jurisdiction of courts in the
United States. MFS may also be hindered or prevented from enforcing its rights
with respect to a governmental instrumentality because of the doctrine of
sovereign immunity.
UUNET
The growth and expansion domestically and internationally of UUNET's
business and its product and service offerings have placed, and are expected to
continue to place, a significant strain on UUNET's management, operational and
financial resources. To manage its growth, UUNET must continue to implement and
improve its operational, financial and management information systems, including
its billing, accounts receivable and payable tracking, fixed assets and other
financial management systems; must continue to hire and train additional
qualified management and technical personnel; and must continue to expand and
upgrade its network infrastructure and operations. Demands on UUNET's network
infrastructure and technical support resources have grown rapidly with UUNET's
expanding customer base, and UUNET from time to time experiences difficulties
meeting the demand for its access services and technical support. UUNET expects
to experience even greater strain on its operational and management resources
and systems as it continues to develop, operate and maintain the portion of its
network infrastructure which is the primary Internet dial-up network and
infrastructure for Microsoft, including The Microsoft Network, continues to
expand its own operations internationally and makes acquisitions domestically
and internationally. Although UUNET is taking steps, including hiring and
training additional personnel, to help ensure that its technical support
resources can manage increased use of its network infrastructure, there can be
no assurance that UUNET's technical support or other resources will be
sufficient to facilitate UUNET's growth. Any failure of UUNET to manage its
growth effectively could have a material adverse effect on UUNET's business,
financial condition and results of operations.
Risks of Foreign Operations. A key component of UUNET's strategy is its
continued expansion into international markets. To date, UUNET has limited
experience in providing international Internet services. There can be no
assurance that UUNET will be able to obtain the capital required to finance its
continued expansion into these markets. In addition, there can be no assurance
that UUNET will be able to obtain the permits and operating licenses required
for it to operate, to hire and train employees or to market, sell and deliver
services in these countries. In certain countries, UUNET has needed to, and will
continue to need to, enter into joint ventures or other strategic relationships
with one or more third parties in order to conduct operations. In addition to
the uncertainty as to UUNET's ability to expand its international presence,
there are certain risks inherent in foreign operations, including management of
a large operation spread over various countries, longer accounts receivable
payment cycles in certain countries, general economic conditions in each
country, currency fluctuations, seasonal reductions in business activity during
the summer months in Europe and certain other parts of the world, loss of
revenue, property and equipment from expropriation, nationalization, war,
insurrection, terrorism and other political risks, the overlap of different tax
structures, risks of increases in taxes and other government fees and
involuntary renegotiation of contracts with foreign governments and
telecommunications carriers. UUNET is also at risk from changes in foreign and
domestic laws, regulations and policies governing foreign operations.
Currency Risks. Exchange rates of foreign currency may fluctuate in
relation to the U.S. dollar. Any such fluctuation may have a material adverse
effect on UUNET's earnings or assets when translated into U.S. dollars. UUNET
may receive a substantial portion of its revenues in foreign currency. Any
increase in value of the U.S. dollar relative to certain foreign currency could
result in lower revenues and earnings when translated into U.S. dollars. UUNET
may enter into foreign exchange contracts to hedge intercompany foreign exchange
transactions,
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but there can be no assurance that exchange rate fluctuations will not have an
adverse effect on UUNET's business, financial condition and results of
operations. There may exist various foreign exchange controls which may delay or
prevent repatriation of foreign profits. There can be no assurance that
additional foreign exchange restrictions will not be imposed or that existing
restrictions will not be strengthened in the future.
Risks Associated with Foreign Tax Liabilities. UUNET or its affiliates
generally will be subject to various taxes in foreign countries where UUNET
operates. UUNET's ability to claim a foreign tax credit against its U.S. federal
income taxes is subject to various limitations. These limitations could result
in a high effective tax rate on UUNET's earnings.
Technology Export Considerations. UUNET relies heavily on equipment
incorporating technology that is developed primarily, or in some cases
exclusively, in the United States. UUNET's current international expansion plans
are dependent upon using this U.S.-developed technology in foreign countries.
Export of technology from the United States or import into a foreign country may
be prohibited or may be subject to duties or other charges of possibly punitive
scale, delays from customs brokers or government agencies, and regulatory or
similar issues. Export from the United States of encryption technology suitable
for commercial transactions is currently severely restricted and in some
countries use of such technology is illegal. Problems with technology export
could have a material adverse effect on UUNET's business, financial condition
and results of operations.
There can be no assurance that laws or administrative practice relating to
taxation, foreign exchange or other matters of countries within which UUNET
operates or will operate will not change. Any such change could have a material
adverse effect on UUNET's business, financial condition and results of
operations.
RAPID TECHNOLOGICAL CHANGES; DEPENDENCE UPON PRODUCT DEVELOPMENT
MFS
The telecommunications industry is subject to rapid and significant changes
in technology. While MFS believes that, for the foreseeable future, these
changes will neither materially and adversely affect the continued use of fiber
optic cable nor materially hinder its ability to acquire necessary technologies,
the effect of technological changes, including changes relating to emerging
wireline and wireless transmission and switching technologies, on the businesses
of MFS cannot be predicted.
UUNET
UUNET's success will depend upon its ability to develop new products and
provide new services that meet changing customer requirements. The market for
UUNET's products and services is characterized by rapidly changing technology,
evolving industry standards, emerging competition and frequent new product and
service introductions. There can be no assurance that UUNET will successfully
identify new product and service opportunities and develop and bring new
products and services to market in a timely manner. UUNET is also at risk from
fundamental changes in the way Internet access services are marketed and
delivered. For example, cable modems have been developed by third parties which
are intended to permit connection to the Internet through the cable network used
for cable television transmission. UUNET's pursuit of necessary technological
advances may require substantial time and expense, and there can be no assurance
that UUNET will succeed in adapting its Internet services business to alternate
access devices and conduits. Failure of UUNET, for technological or other
reasons, to develop and introduce new products and product enhancements and new
services that are compatible with industry standards and that satisfy customer
requirements would have a material adverse effect on UUNET's business, financial
condition and results of operations.
In addition, UUNET or its competitors may announce enhancements to existing
products or services, or new products or services embodying new technologies,
industry standards or customer requirements that have the potential to replace
or to provide lower cost alternatives to UUNET's existing products and services.
The introduction of such enhancements or new products and services could render
UUNET's existing products and services obsolete and unmarketable. Specifically,
UUNET's services rely on the continued widespread commercial use of Transmission
Control Protocol/Internetwork Protocol ("TCP/IP"). Alternative open protocol and
proprietary protocol standards have been or are being developed. If any of these
alternative protocols becomes widely adopted, there may be a reduction in the
use of TCP/IP. There can be no assurance that the announcement or introduction
of new products or services by UUNET or its competitors or any change in
industry standards will not cause
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customers to defer or cancel purchases of existing products or services, which
could have a material adverse effect on UUNET's business, financial condition
and results of operations.
Furthermore, introduction by UUNET of products or services with
reliability, quality or compatibility problems could result in reduced orders,
delays in collecting accounts receivable and additional service costs. The
failure to introduce a new product, service or product enhancement on a timely
basis could delay or hinder market acceptance. Products and services as complex
as those offered by UUNET may contain undetected errors or defects when first
introduced or as new versions are released. There can be no assurance that,
despite testing by UUNET or its customers, errors will not be found in new
products after commencement of commercial deployment, resulting in product
redevelopment costs and loss of, or delay in, market acceptance. Any such event
could have a material adverse effect on UUNET's business, financial condition
and results of operations.
DEPENDENCE ON KEY PERSONNEL
MFS' and UUNET's businesses are managed by a small number of key executive
officers, the loss of certain of whom could have a material adverse effect on
MFS and UUNET. MFS and UUNET believe that their future success will depend in
large part on their continued ability to attract and retain highly skilled and
qualified personnel. MFS does not have employment agreements with any of
its key executive officers.
DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY RISKS
UUNET's success will depend upon the capacity, reliability and security of
its network infrastructure. UUNET derives a substantial portion of its revenue
by charging fees to connect customers to the Internet. UUNET must continue to
expand and adapt its network infrastructure domestically and internationally as
the number of users and the amount of information they wish to transfer
increases, and to meet changing customer requirements. The expansion and
adaptation of UUNET's network infrastructure requires, and will continue to
require, substantial financial, operational and management resources. UUNET has,
from time to time, been unable to meet additional demand and customer
requirements. For example, customers from time to time are unable to obtain
Internet access during hours of peak use. In addition, delays in providing
Internet access are often caused by delays in receiving telecommunication
services from suppliers. There can be no assurance that UUNET will be able to
expand or adapt its network infrastructure to meet additional demand or its
customers' changing requirements on a timely basis, at a commercially reasonable
cost, or at all, or that UUNET will be able to deploy successfully the planned
data communications networks. Any failure of UUNET to expand its network
infrastructure on a timely basis or adapt it either to changing customer
requirements or to evolving industry standards could have a material adverse
effect on UUNET's business, financial condition and results of operations.
In addition, the operations of UUNET are dependent upon its ability to
protect its network infrastructure against damage from fire, earthquakes,
floods, mudslides, power loss, telecommunications failures and similar events. A
significant portion of its computer equipment, including critical equipment
dedicated to its Internet access services, is located at facilities in Fairfax,
Virginia and Cambridge, England. In addition, UUNET's modems and routers that
serve large areas of the U.S. and a large portion of the United Kingdom are
concentrated in several cities. Despite precautions taken, the occurrence of a
natural disaster or other unanticipated problem at a network operations center,
hubs (sites at which routers, switches and other computer equipment which make
up the backbone of the network infrastructure are located) or at a number of
POPs (points-of-presence, geographic areas in which UUNET allows local access)
has caused, and in the future could cause, interruptions in network access by
customers. In addition, failure of UUNET's or Unipalm's telecommunications
providers to provide data communications capacity as a result of a natural
disaster, operational disruption or for any other reason could cause
interruptions in network access by customers. Any damage or failure that causes
interruptions in operations could have a material adverse effect on UUNET's
business, financial condition and results of operations.
Despite the implementation of security measures, the core of UUNET's
network infrastructure is vulnerable to computer viruses, break-ins and other
disruptive problems. UUNET and other Internet access providers have in the past
experienced, and may in the future experience, interruptions in service as a
result of the
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accidental or intentional actions of Internet users, current and former
employees or others. Unauthorized use could also potentially jeopardize the
security of confidential information stored in the computer systems of UUNET and
its customers, which may result in liability of UUNET to its customers and also
may deter potential subscribers. Although UUNET intends to continue to implement
industry-standard security measures, such measures have been circumvented in the
past, and there can be no assurance that measures implemented by UUNET will not
be circumvented in the future. Eliminating computer viruses and alleviating
other security problems may require interruptions, delays or cessation of
service to UUNET's customers which could have a material adverse effect on
UUNET's business, financial condition and results of operations.
VARIABILITY OF QUARTERLY OPERATING RESULTS
MFS
As a result of the significant expenses associated with the expansion and
development of its networks and services, MFS anticipates that its operating
results could vary significantly from period to period and such variability
could adversely affect MFS' results of operations. In addition, MFS' network
systems integration revenues are and generally will continue to be dependent
upon a small number of large projects. Accordingly, these revenues are likely
to vary significantly from period to period, and such variability could
adversely affect MFS' results of operations.
UUNET
UUNET's quarterly operating results have in the past varied and are
expected in the future to vary significantly depending upon factors such as the
timing and installation of significant orders, which in the past have been, and
will in the future be, delayed from time to time by delays in the installation
of lines and equipment by UUNET's telecommunications subcontractors. Additional
factors contributing to variability of operating results include the pricing and
mix of services and products sold by UUNET, customer terminations of service,
new product introductions by UUNET and its competitors, market acceptance of new
and enhanced versions of UUNET's products and services, competitive factors such
as quality of service by UUNET and its competitors and changes in pricing
policies by its competitors, UUNET's ability to obtain sufficient supplies of
sole or limited source components and to integrate successfully such components
into its products and network infrastructure, the timing of the expansion of
UUNET's network infrastructure domestically and internationally, the timing and
costs of marketing and advertising efforts, and the timing and costs of any
acquisitions of businesses, products or technologies. In response to competitive
pressures, UUNET may take certain pricing or marketing actions that could have a
material adverse effect on UUNET's business, financial condition and results of
operations. As a result, variations in the timing and amounts of revenues could
have a material adverse effect on UUNET's quarterly operating results.
In addition, each of MFS and UUNET expects competition in its business to
increase and that competitors will offer new and existing products and services
at prices necessary to gain or retain market share and customers. This
competition and continuing price erosion for basic Internet access and telephone
services could adversely affect the results of operations of the combined
company in any given quarter. In addition, the combined company's operating
results may also be subject to significant quarterly fluctuations as a result of
other factors, including product mix, variations in product cost and pricing,
delays in product development and introduction, increased competition and the
general level of economic activity in the markets served by the combined
company.
UUNET'S RELIANCE ON STRATEGIC RELATIONSHIP WITH MICROSOFT
In December 1994, UUNET and Microsoft entered into a strategic relationship
for the development, operation and maintenance of a large-scale high speed dial-
up and ISDN TCP/IP access network which is the primary Internet dial-up network
and infrastructure for Microsoft, including The Microsoft Network. The parties
entered into a TCP/IP Local Access Network Agreement (the "Microsoft Agreement")
and a loan agreement under which Microsoft agreed to lend to UUNET up to $26.0
million to cover the anticipated capital cost of the network equipment. Revenues
from Microsoft totaled approximately 20% and 37% of consolidated revenues during
the year
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ended December 31, 1995 and the quarter ended March 31, 1996, respectively.
UUNET expects that it will continue to derive a significant portion of its
revenues from Microsoft for at least the next several years, and the Microsoft
Agreement limits UUNET's ability to enter into similar agreements for the
development of other large-scale dial-up networks prior to March 1997. Although
UUNET has met Microsoft's needs through March 31, 1996, there can be no
assurance that UUNET will be able to meet all future deployment commitments to
Microsoft. After September 1996, Microsoft may terminate the Microsoft Agreement
if UUNET breaches certain material terms of the Microsoft Agreement and is
unable to cure, thereby causing a sustained operational failure of the dial-up
network. In addition, Microsoft may terminate the Microsoft Agreement if, prior
to March 2000, certain competitors of Microsoft acquire majority ownership of
UUNET, and Microsoft has the right to impose performance penalties in certain
other situations. Termination of the Microsoft Agreement by Microsoft for any
reason could, at Microsoft's option, result in the loss of all future revenues
from Microsoft and the acceleration of UUNET's obligation to pay to Microsoft
amounts due under the loan agreement. Any such termination, loss or acceleration
or imposition of penalties would have a material adverse effect on UUNET's
business, financial condition and results of operations. In addition, any
regulatory or private party legal challenges to The Microsoft Network, including
those in the United States and Europe which have been threatened to date, could
result in termination or restructuring of UUNET's strategic relationship with
Microsoft, which would have a material adverse effect on UUNET. The terms of
construction, maintenance and operation (including the allocation of costs and
payment of fees) of international gateway hubs beyond the initial 14 such hubs
are subject to future agreement between Microsoft and UUNET. UUNET expects that
the terms of any funding or revenues from Microsoft relating to additional
international hubs, if any, will be different from those of the Microsoft
Agreement. In addition, UUNET and Microsoft have an understanding that providers
of Internet access services (such as the PTTs) will begin to bear certain of the
costs of the 14 international gateway hubs. As this begins, Microsoft's share of
such costs will decrease, and UUNET will become more dependent upon such
providers and other customers for revenues to support such costs. Microsoft
continues to evolve its international strategy for The Microsoft Network, and
its final strategy may differ materially from that originally anticipated.
Although UUNET is Microsoft's primary Internet access provider, there can be no
assurance that Microsoft will obtain additional Internet network infrastructure
or capacity it may require from UUNET, other than that specified in the
Microsoft Agreement. Microsoft has announced a relationship with MCI under which
MCI will resell The Microsoft Network, Microsoft's Internet Explorer Web browser
software, and other Microsoft Internet-related software. Although the terms of
the relationship have not been fully disclosed, this relationship with MCI may
allow access to The Microsoft Network through MCI's dial-up network. Further,
Microsoft is developing relationships with other Internet service providers to
resell The Microsoft Network and the Internet Explorer. As originally planned,
Microsoft is developing relationships with foreign and domestic
telecommunications companies and Internet access providers to resell access to
The Microsoft Network. If Microsoft fully develops these resale relationships,
the Company's revenues may not increase beyond Microsoft's guaranteed minimum
payments. Any failure of such revenues to increase could have a material adverse
effect on the Company's business, financial condition and results of operations.
UUNET'S DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY
UUNET relies on other companies to supply certain key components of its
network infrastructure, including telecommunications services and networking
equipment, which, in the quantities and quality demanded by UUNET, are available
only from sole or limited sources. WorldCom, MFS, Cable and Wireless and GEIS
are the primary providers to UUNET of data communications facilities and
capacity and lease physical space to UUNET for switches, modems and other
equipment. If UUNET were required to vacate any such facilities because of a
termination of the agreement by the lessor or for any other reason, UUNET would
be required to expend a significant amount of money and effort in obtaining and
equipping another facility to service the affected locale. There can be no
assurance that UUNET could obtain or equip another facility if necessary. UUNET
is also dependent upon LECs to provide telecommunications services to UUNET and
its customers. UUNET has from time to time experienced delays in receiving
telecommunications services, and there can be no assurance that UUNET will be
able to obtain such services on the scale and within the time frames required by
UUNET at an affordable cost, or at all. Any failure to obtain such services or
additional capacity on a timely basis at an affordable cost, or at all, would
have a material adverse effect on UUNET's business, financial condition and
results of operations.
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The routers used in UUNET's network infrastructure are supplied solely by
Cisco. In addition, the switches, modems and bandwidth managers primarily used
in UUNET's network infrastructure are supplied solely by Cascade Communications
Corporation ("Cascade"), Ascend Communications, Inc. ("Ascend") and OnStream
Networks ("OnStream," formerly T3plus Networking), respectively. UUNET purchases
these components pursuant to purchase orders placed from time to time, does not
carry significant inventories of these components and has no guaranteed supply
arrangements. UUNET's suppliers also sell products to UUNET's competitors and
may in the future become competitors of UUNET. There can be no assurance that
UUNET's suppliers will not enter into exclusive arrangements with UUNET's
competitors or stop selling their products or components to UUNET at
commercially reasonable prices or at all. UUNET from time to time experiences
delays in receiving components. Expansion of network infrastructures by UUNET
and others is placing, and will continue to place, a significant demand on
UUNET's suppliers, some of which have limited resources and production capacity.
In addition, certain of UUNET's suppliers, in turn, rely on sole or limited
sources of components included in their products. Failure of UUNET's suppliers
to adjust to meet demand may prevent them from continuing to supply components
and products in the quantities and quality and at the times required by UUNET,
or at all. UUNET's inability to obtain sufficient quantities of sole or limited
source components or to develop alternative sources if required could result in
delays and increased costs in expanding, and overburdening of, UUNET's network
infrastructure, which would have a material adverse effect on UUNET's business,
financial condition and results of operations.
UUNET also is dependent on its suppliers' ability to provide necessary
products and components that comply with various Internet and telecommunications
standards, interoperate with products and components from other vendors and
function as intended when installed as part of the network infrastructure. Any
failure of UUNET's sole or limited source suppliers to provide products or
components that comply with Internet standards, interoperate with other products
or components used by UUNET in its network infrastructure or by its customers or
fulfill their intended function as a part of the network infrastructure could
have a material adverse effect on UUNET's business, financial condition and
results of operations.
Certain of UUNET's suppliers, including the BOCs and other LECs, currently
are subject to tariff controls and other price constraints which in the future
may be changed. In addition, the Telecom Act will produce changes in
the market for telecommunications services. These changes may affect the prices
charged by the BOCs and other LECs to UUNET. Any such changes could result in
increased prices of products and services which could have a material adverse
effect on UUNET's business, financial condition and results of operations.
UUNET'S DEPENDENCE UPON NEW AND UNCERTAIN MARKET
Substantially all of UUNET's consolidated revenues to date have been, and
for the foreseeable future will be, derived from the sale of its Internet access
options, applications and consulting services. UUNET's success will depend upon
the development and expansion of the market domestically and internationally for
Internet access services and products and the networks which comprise the
Internet. The market for Internet access services began developing in the last
few years in the United States and the United Kingdom and more recently in other
countries. Certain critical issues concerning commercial use of the Internet,
including security, reliability, capacity, ease and cost of access, quality
of service and regulation remain unresolved and may impact the growth of
Internet use. UUNET cannot predict the size of the market or the rate at which
the market will grow. If the Internet access market fails to grow, grows more
slowly than anticipated, or becomes saturated with competitors, UUNET's
business, financial condition and results of operations would be materially
adversely affected.
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TAX NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1995, MFS and UUNET had net operating loss carryforwards
("NOLs") of approximately $420 million and $12 million, which expire in years
through 2010, respectively.
MFS believes that the Merger will cause an "ownership change" within the
meaning of Section 382 of the Code with respect to both MFS and UUNET.
Consequently, MFS' and UUNET's NOL and credit carryovers from periods prior to
the Merger will be subject to annual limitations. Under Section 382, a
corporation is only allowed to use a portion of its NOL and credit carryovers
from periods prior to an ownership change to offset its income from periods
subsequent to the ownership change each year. This yearly limitation (the
"Section 382 limitation") is generally equal to the value of all of the
outstanding stock of the corporation immediately prior to the ownership change
multiplied by the "applicable long term rate" (the applicable rate for an
ownership change occurring in May 1996, is 5.68%).
MFS will be required to pay federal income tax in any year in which MFS'
and UUNET's taxable income exceeds the amount of each of MFS' and UUNET's
Section 382 limitation plus any NOL and credit carryovers from years subsequent
to the ownership change. To the extent that either MFS or UUNET does not use
the full amount of its Section 382 limitation in any year, such unused portion
can be used to increase the Section 382 limitation for subsequent years. Based
on the value of MFS and UUNET prior to the Merger, the amount of NOLs of each
company prior to the Merger and the fact that MFS expects to have significant
NOLs in 1996 and 1997, MFS believes that the Section 382 limitation will not
have a material effect on its federal income tax liability.
ANTI-TAKEOVER PROVISIONS IN MFS' CHARTER AND BY-LAWS
MFS' Restated Certificate of Incorporation and By-laws contain provisions
that could delay, defer or prevent a change in control without the approval of
its incumbent Board of Directors. These provisions, among other things, (i)
divide the MFS Board of Directors into three classes, with members of each class
to be elected in staggered three-year terms, (ii) prohibit stockholder action by
written consent in lieu of a meeting, (iii) limit the right to call special
meetings of stockholders and (iv) authorize the MFS Board of Directors to issue
preferred stock in one or more classes or series without any action on the part
of stockholders. Such provision could limit the price that investors might be
willing to pay in the future for shares of MFS Common Stock and significantly
impede the ability of the holders of MFS Common Stock to replace management. In
addition, MFS has adopted the MFS Rights Plan, which has certain anti-takeover
effects. The MFS Rights Plan will cause substantial dilution to a person or
group that attempts to acquire MFS on terms not approved by MFS' Board of
Directors. Provisions and agreements that inhibit or discourage takeover
attempts could reduce the market value of the MFS Common Stock.
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THE UUNET SPECIAL MEETING
PURPOSE OF THE UUNET SPECIAL MEETING
At the UUNET Special Meeting, holders of UUNET Common Stock will consider
and vote upon a proposal to approve and adopt the Merger Agreement and such
other matters as may properly be brought before the UUNET Special Meeting.
THE BOARD OF DIRECTORS OF UUNET HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
RECORD DATE; VOTING RIGHTS; PROXIES
The UUNET Board of Directors has fixed the close of business on
____________, 1996 as the UUNET Record Date for determining holders entitled to
notice of and to vote at the UUNET Special Meeting.
As of the UUNET Record Date, there were __________ shares of UUNET Common
Stock issued and outstanding, each of which entitles the holder thereof to one
vote. All shares of UUNET Common Stock represented by properly executed proxies
will, unless such proxies have been previously revoked, be voted in accordance
with the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE
INDICATED, SUCH SHARES OF UUNET COMMON STOCK WILL BE VOTED FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT.
UUNET does not know of any matters other than as described in the Notice of
Special Meeting that are to come before the UUNET Special Meeting. If any other
matter or matters are properly presented for action at the UUNET Special
Meeting, the persons named in the enclosed form of proxy and acting thereunder
will have the discretion to vote on such matters in accordance with their best
judgment, unless such authorization is withheld. A stockholder who has given a
proxy may revoke it at any time prior to its exercise by giving written notice
thereof to the Secretary of UUNET, by signing and returning a later dated proxy,
or by voting in person at the UUNET Special Meeting; however, mere attendance at
the UUNET Special Meeting will not in and of itself have the effect of revoking
the proxy.
The presence in person or by properly executed proxy of holders of a
majority of the issued and outstanding shares of UUNET Common Stock entitled to
vote is necessary to constitute a quorum at the UUNET Special Meeting. Votes
cast by proxy or in person at the UUNET Special Meeting will be tabulated by the
election inspectors appointed for the meeting who will determine whether or not
a quorum is present. Where, as to any matter submitted to the stockholders for
a vote, proxies are marked as abstentions (or stockholders appear in person but
abstain from voting), such abstentions will be treated as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum but as unvoted for purposes of determining the approval of any matter
submitted to the stockholders for a vote. If a broker indicates on the proxy
that it does not have discretionary authority as to certain shares to vote on a
particular matter, those shares will not be considered as present and entitled
to vote with respect to that matter.
SOLICITATION OF PROXIES
UUNET will bear its own cost of solicitation of proxies. In addition to
the use of the mails, proxies may be solicited by the directors and officers of
UUNET by personal interview, telephone, telegram or e-mail. Such directors and
officers will not receive additional compensation for such solicitation but may
be reimbursed for out-of-pocket expenses incurred in connection therewith.
Arrangements may also be made with brokerage firms and other custodians,
nominees and fiduciaries to forward solicitation materials to the beneficial
owners of shares of UUNET Common Stock held of record by such persons, in which
case UUNET will reimburse such brokerage firms, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them in connection
therewith.
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REQUIRED VOTE
The approval of the Merger requires the affirmative vote of the holders of
a majority of the outstanding shares of UUNET Common Stock. As of the UUNET
Record Date, there were ___________ shares of UUNET Common Stock outstanding and
entitled to vote held by approximately ___________ stockholders of record. As
of the UUNET Record Date, directors and officers of UUNET as a group
beneficially owned __________ shares of UUNET Common Stock, or approximately
___% of those shares of UUNET Common Stock outstanding as of such date.
Pursuant to the Stock Option Agreement, certain stockholders of UUNET have
granted irrevocable proxies in favor of MFS to vote all of such stockholders'
shares of UUNET Common Stock held as of the UUNET Record Date in favor of the
Merger Agreement and the Merger (______ shares of UUNET Common Stock or
approximately ___% of the outstanding shares of UUNET Common Stock as of the
UUNET Record Date). ACCORDINGLY, BY VIRTUE OF SUCH STOCKHOLDERS' OWNERSHIP OF
____% OF THE OUTSTANDING UUNET COMMON STOCK, THE PROPOSAL TO ADOPT AND APPROVE
THE MERGER AGREEMENT WILL BE ADOPTED WITHOUT THE VOTE OF ANY OTHER STOCKHOLDERS.
SEE "STOCK OPTION AGREEMENT."
Under applicable Delaware law, abstentions will be present and entitled to
vote, and will, therefore, have the effect of a negative vote on the approval
and adoption of the Merger Agreement. A broker non-vote will have the effect of
a vote against the approval and adoption of the Merger Agreement.
THE MATTERS TO BE CONSIDERED AT THE UUNET SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE STOCKHOLDERS OF UUNET. ACCORDINGLY, STOCKHOLDERS ARE URGED TO
READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT PROXY
STATEMENT-PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE.
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THE MFS ANNUAL MEETING
PURPOSES OF THE MFS ANNUAL MEETING
At the MFS Annual Meeting, holders of MFS Capital Stock will consider and
vote upon the MFS Share Proposal to approve the issuance of shares of MFS Common
Stock pursuant to the Merger Agreement or the Stock Option Agreement. At the
MFS Annual Meeting, holders of MFS Capital Stock will also be asked to consider
and act upon the following matters: (a) the reelection to the MFS Board of
Directors of four Class I Directors for a three-year term until the 1999 Annual
Meeting; (b) the adoption of amendments to the MFS 1993 Stock Plan; (c) the
adoption of amendments to the MFS 1995 Deferred Stock Purchase Plan; (d) the
ratification of the appointment by the MFS Board of Directors of Coopers &
Lybrand L.L.P. as independent auditors of MFS for the 1996 fiscal year; and (e)
the transaction of such other business as may properly come before the MFS
Annual Meeting. Although Delaware law and the Amended & Restated Certificate of
Incorporation of MFS do not require MFS to obtain stockholder approval of the
Merger because UUNET is merging with a subsidiary of MFS, rather than MFS
itself, due to the number of shares of MFS Common Stock to be issued in either
the Merger or the exercise of the Option, Nasdaq requires MFS to obtain
stockholder approval of the issuance of such shares. Stockholder approval of
the MFS Share Proposal will constitute the approval required by Nasdaq for the
issuance of the MFS Common Stock in connection with the Merger or the exercise
of the Option.
THE BOARD OF DIRECTORS OF MFS HAS APPROVED BY THE UNANIMOUS VOTE OF THOSE
DIRECTORS PRESENT THE MERGER AGREEMENT AND THE MFS SHARE PROPOSAL IN CONNECTION
WITH THE MERGER AND RECOMMENDS A VOTE FOR THE MFS SHARE PROPOSAL. THE MFS BOARD
OF DIRECTORS ALSO RECOMMENDS THAT ITS STOCKHOLDERS REELECT THE FOUR CLASS I
DIRECTORS FOR A THREE-YEAR TERM UNTIL THE 1999 ANNUAL MEETING OF STOCKHOLDERS,
APPROVE THE PROPOSED AMENDMENTS TO THE MFS 1993 STOCK PLAN, APPROVE THE PROPOSED
AMENDMENTS TO THE MFS 1995 DEFERRED STOCK PURCHASE PLAN AND RATIFY THE
APPOINTMENT BY THE MFS BOARD OF DIRECTORS OF COOPERS & LYBRAND L.L.P. AS
INDEPENDENT AUDITORS OF MFS FOR THE 1996 FISCAL YEAR. SEE "MFS REELECTION OF
CLASS I DIRECTORS PROPOSAL," "MFS AMENDMENT TO AMENDED AND RESTATED 1993 STOCK
PLAN PROPOSAL," "MFS AMENDMENT TO 1995 DEFERRED STOCK PURCHASE PLAN (AMENDED AND
RESTATED AS OF AUGUST 28, 1995) PROPOSAL," AND "MFS RATIFICATION OF THE
SELECTION OF INDEPENDENT ACCOUNTANTS PROPOSAL," RESPECTIVELY.
RECORD DATE; VOTING RIGHTS; PROXIES
The MFS Board of Directors has fixed the close of business on ________,
1996 as the MFS Record Date for determining holders of MFS Capital Stock
entitled to notice of and to vote at the MFS Annual Meeting.
As of the Record Date, there were __________ shares of MFS Common Stock
outstanding, ______ shares of the Series A Preferred outstanding and ______
shares of Series B Preferred outstanding. Each share of MFS Common Stock is
entitled to one vote per share, each share of Series A Preferred is entitled to
ten votes per share, and each share of Series B Preferred is entitled to ten
votes per share on each matter to be voted upon at the MFS Annual Meeting. All
shares of MFS Capital Stock represented by properly executed proxies will,
unless such proxies have been previously revoked, be voted in accordance with
the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED,
SUCH SHARES OF MFS CAPITAL STOCK WILL BE VOTED IN FAVOR OF THE MFS SHARE
PROPOSAL, THE REELECTION OF THE CLASS I DIRECTORS, THE AMENDMENTS TO THE MFS
1993 STOCK PLAN, THE AMENDMENTS TO THE MFS 1995 DEFERRED STOCK PURCHASE PLAN,
THE AMENDMENTS TO THE MFS 1995 DEFERRED STOCK PURCHASE PLAN AND THE RATIFICATION
OF THE APPOINTMENT OF COOPERS & LYBRAND L.L.P.
As stated above, each share of Series B Preferred is entitled to ten votes
per share. The shares of Series B Preferred, however, are held subject to an
irrevocable proxy that has been granted to the Secretary and Assistant Secretary
of MFS to vote all shares of Series B Preferred on all matters, other than the
election of MFS directors and matters as to which the holders of the Series B
Preferred vote as a separate class, in proportion to the vote of the holders of
the MFS Common Stock. The MFS Share Proposal, the amendments to the MFS 1993
Stock Plan, the amendments to the MFS 1995 Deferred Stock Purchase Plan and the
ratification of the appointment of Coopers & Lybrand L.L.P. as independent
auditors of MFS for the 1996 fiscal year do not require a separate class vote by
the holders of the Series B Preferred.
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MFS does not know of any matters other than as described in the Notice of
Annual Meeting that are to come before the MFS Annual Meeting. If any other
matter or matters are properly presented for action at the MFS Annual Meeting,
the persons named in the enclosed form of proxy and acting thereunder will have
the discretion to vote on such matters in accordance with their best judgment,
unless such authorization is withheld. A stockholder who has given a proxy may
revoke it at any time prior to its exercise by giving written notice thereof to
the Secretary of MFS by signing and returning a later dated proxy, or by voting
in person at the MFS Annual Meeting; however, mere attendance at the MFS Annual
Meeting will not in and of itself have the effect of revoking the proxy.
Votes cast by proxy or in person at the MFS Annual Meeting will be
tabulated by the election inspectors appointed for the meeting, who will
determine whether or not a quorum is present. Where, as to any matter submitted
to the stockholders for a vote, proxies are marked as abstentions (or
stockholders appear in person but abstain from voting), such abstentions will be
treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum but as unvoted for purposes of determining
the approval of any matter submitted to the stockholders for a vote. If a
broker indicates on the proxy that it does not have discretionary authority as
to certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter.
SOLICITATION OF PROXIES
MFS will bear its own cost of solicitation of proxies. In addition to the
use of the mails, proxies may be solicited by the directors and officers of MFS
by personal interview, telephone or telegram. Such directors and officers will
not receive additional compensation for such solicitation but may be reimbursed
for out-of-pocket expenses incurred in connection therewith. Arrangements may
also be made with brokerage firms and other custodians, nominees and fiduciaries
to forward solicitation materials to the beneficial owners of shares of MFS
Common Stock held of record by such persons, in which case MFS will reimburse
such brokerage firms, custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred by them in connection therewith.
QUORUM
The presence in person or by properly executed proxy of holders of a
majority of the issued and outstanding shares of MFS Capital Stock entitled to
vote is necessary to constitute a quorum at the MFS Annual Meeting. Under
applicable Delaware law, abstentions and "broker non-votes" (i.e., proxies from
brokers or nominees indicating that such persons have not received instructions
from the beneficial owner or other persons entitled to vote shares as to a
matter with respect to which the brokers or nominees do not have discretionary
power to vote) will be treated as present for purposes of determining the
presence of a quorum at the MFS Annual Meeting.
REQUIRED VOTE
The approval of the MFS Share Proposal requires the affirmative vote of a
majority of votes cast by the holders of the outstanding shares of MFS Capital
Stock at a meeting at which a quorum is present. The four Class I Directors will
be elected by a plurality of the votes cast by holders of MFS Capital Stock
present in person or by proxy and entitled to vote at the MFS Annual Meeting.
The proposals to amend the MFS 1993 Stock Plan, to amend the MFS 1995 Deferred
Stock Purchase Plan and to ratify the appointment by the MFS Board of Directors
of Coopers & Lybrand L.L.P. as independent auditors of MFS for the 1996 fiscal
year require the affirmative vote of the holders of a majority of the votes
entitled to be cast in respect of all outstanding shares of MFS Capital Stock
present in person or by proxy at the MFS Annual Meeting and entitled to vote
thereon.
Under applicable Delaware law, abstentions will be present and entitled to
vote, and will, therefore, have the effect of a negative vote on the MFS Share
Proposal, the proposal to amend the MFS 1993 Stock Plan, the proposal to amend
the MFS 1995 Deferred Stock Purchase Plan and the proposal to ratify the
appointment of Coopers & Lybrand L.L.P., but will have no effect on the outcome
of the reelection of Class I
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Directors. A broker non-vote will have no effect on the MFS Share Proposal, the
proposal to amend the MFS Stock Plan, the proposal to amend the MFS 1995
Deferred Stock Purchase Plan, the proposal to ratify the appointment of Coopers
& Lybrand L.L.P. or the outcome of the reelection of Class I Directors.
As of the MFS Record Date, the directors and executive officers of MFS as a
group beneficially owned _________ shares of the MFS Common Stock and _______
shares of the Series B Preferred, representing in the aggregate approximately
_____% of outstanding votes at that date. Pursuant to the MFS Voting Agreement,
certain stockholders of MFS, all of whom are Directors of MFS, granted
irrevocable proxies to vote all of such stockholders' shares of MFS Common Stock
held as of the MFS Record Date in favor of the MFS Share Proposal (________
shares of MFS Common Stock or approximately ____% of the outstanding MFS Common
Stock as of the MFS Record Date). See "MFS VOTING AGREEMENT."
THE MATTERS TO BE CONSIDERED AT THE MFS ANNUAL MEETING ARE OF GREAT
IMPORTANCE TO THE STOCKHOLDERS OF MFS. ACCORDINGLY, STOCKHOLDERS ARE URGED TO
READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY STATEMENT,
AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE
ENCLOSED POSTAGE PAID ENVELOPE.
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THE MERGER
GENERAL
The Merger Agreement provides that the Merger will be consummated if the
approvals of the UUNET and MFS stockholders required therefor are obtained and
all other conditions to the Merger are satisfied or waived. Upon consummation
of the Merger, Sub will be merged with and into UUNET, and UUNET will become a
wholly owned subsidiary of MFS.
Upon consummation of the Merger, each outstanding share of UUNET Common
Stock (other than shares owned by UUNET as treasury stock or by its subsidiaries
or by MFS or its subsidiaries, all of which will be canceled) will be
automatically converted (subject to provisions with respect to fractional
shares) into the right to receive 1.777776 shares of MFS Common Stock. Each
share of new MFS Common Stock issued in connection with the Merger will be
accompanied by one MFS Right.
Based upon the capitalization of UUNET and MFS as of the MFS Record Date,
as represented in the Merger Agreement, the stockholders of UUNET will own
approximately ____% of the outstanding MFS Common Stock following consummation
of the Merger. Such percentage could change depending on the number of shares
of MFS Common Stock and UUNET Common Stock issued upon exercise of outstanding
UUNET and MFS stock options or otherwise issued prior to the Effective Date.
EFFECTIVE DATE
The Effective Date of the Merger will occur upon the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware (the
"Certificate of Merger") or at such later time as is specified on such
certificate. The filing of the Certificate of Merger will occur as soon as
practicable after the satisfaction of the conditions set forth in the Merger
Agreement. The Merger Agreement may be terminated by either party if the Merger
has not been consummated on or before November 30, 1996 and under certain other
conditions. See "THE MERGER-Conditions to the Consummation of the Merger" and
"THE MERGER AGREEMENT-Termination; Fees and Expenses."
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
The conversion, at the Exchange Ratio, of UUNET Common Stock into the right
to receive MFS Common Stock will occur automatically at the Effective Date.
On the Effective Date, MFS will instruct the Exchange Agent to mail to each
holder of record of UUNET Common Stock within three business days a transmittal
letter and instructions for use in effecting the surrender of certificates which
represented shares of UUNET Common Stock. Upon receipt of such certificates,
the Exchange Agent will deliver full shares of MFS Common Stock to such
stockholder and cash in lieu of fractional shares pursuant to the terms of the
Merger Agreement and in accordance with the transmittal letter, together with
any dividends or other distributions to which such stockholder is entitled
without interest.
If any issuance of shares of MFS Common Stock in exchange for shares of
UUNET Common Stock is to be made to a person other than the holder of UUNET
Common Stock in whose name the certificate is registered at the Effective Date,
it will be a condition of such exchange that the certificate so surrendered be
properly endorsed or otherwise in proper form for transfer and that the holder
of UUNET Common Stock requesting such issuance either pay any transfer or other
tax required or establish to the satisfaction of MFS that such tax has been paid
or is not payable.
After the Effective Date, there will be no further transfers of UUNET
Common Stock on the stock transfer books of UUNET. If a certificate
representing UUNET Common Stock is presented for transfer, it will be canceled
and a certificate representing the appropriate number of full shares of MFS
Common Stock and cash in lieu of fractional shares and any dividends and
distributions will be issued in exchange therefor, without interest.
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After the Effective Date and until surrendered, shares of UUNET Common
Stock will be deemed for all corporate purposes, other than the payment of
dividends and distributions, to evidence ownership of the number of full shares
of MFS Common Stock into which such shares of UUNET Common Stock were converted
on the Effective Date. No dividends or other distributions, if any, payable to
holders of MFS Common Stock will be paid to the holders of any certificates for
shares of UUNET Common Stock until such certificates are surrendered. Upon
surrender of such certificates, all such declared dividends and distributions
payable after the Effective Date will be paid to the holder of record of the
full shares of MFS Common Stock represented by the certificate issued in
exchange therefor, without interest.
HOLDERS OF UUNET COMMON STOCK SHOULD NOT FORWARD STOCK CERTIFICATES TO THE
EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. HOLDERS OF UUNET
COMMON STOCK SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
BACKGROUND TO THE MERGER
On February 27, 1996, James Q. Crowe, Chairman of the Board and Chief
Executive Officer of MFS and Frederick W. Weidinger, Vice President of MFS, met
with Richard L. Adams, Jr., Chairman of the Board and Chief Technical Officer of
UUNET, and John W. Sidgmore, President and Chief Executive Officer of UUNET, at
the executive offices of UUNET, for the purpose of discussing a possible
commercial or a strategic relationship. During this meeting, each side
described what each considered to be the synergies between MFS and UUNET. These
discussions did not give rise to a proposal with respect to a transaction, but
it was agreed that the parties would hold further discussions.
During the first week of March 1996, MFS and UUNET executed a nondisclosure
agreement and Messrs. Crowe, Weidinger, Sidgmore and Adams met again to discuss
a possible strategic relationship. On March 7, 1996, a discussion of financial
information occurred between Messrs. Weidinger and Sidgmore, while at the same
time other members of management of both MFS and UUNET discussed technical
synergies between the two companies. Although these business discussions did
not give rise to a specific proposal with respect to a transaction, the parties
continued to discuss possible transaction terms and held a meeting at the
offices of MFS on March 20, 1996. During the remainder of March, the parties
continued to discuss technical matters and possible transaction terms.
On April 4, 1996, a meeting took place at the offices of Gleacher NatWest,
between Gleacher NatWest and Goldman Sachs to discuss UUNET. From April 5
through April 9, the parties continued to discuss the possible transaction terms
and results of the discussion held between their respective financial advisors.
On April 16, 1996, Messrs. Crowe and Sidgmore met to discuss possible
transaction terms. On April 18, 1996, MFS proposed a transaction whereby a
subsidiary of MFS would merge with and into UUNET with UUNET as the surviving
entity, and the consideration for such transaction would be a fixed exchange of
MFS Common Stock for the UUNET Common Stock. In addition, as an inducement for
MFS to enter into a transaction on this basis, MFS requested that certain
stockholders of UUNET execute an agreement pursuant to which such stockholders
would agree to vote their shares of UUNET Common Stock in favor of the Merger
and against any other proposed business transaction, grant irrevocable proxies
to MFS to vote their shares of UUNET Common Stock in favor of the Merger and
against any other proposed business combination transaction and grant MFS an
option to purchase their shares of Common Stock in exchange for the same
consideration that would be given in the proposed Merger. UUNET suggested that
the merger consideration include a cash component.
From April 19 through April 21, Messrs. Sidgmore and Weidinger spoke by
telephone to discuss the status of the proposed transaction. During this
period, each party's respective financial advisors spoke by telephone to review
the status of the progress toward an agreement upon the terms of the
transaction. During a meeting of the MFS Board of Directors on April 23, a
proposed business combination with UUNET was discussed. On April 25, Messrs.
Crowe, Weidinger and R. Douglas Bradbury, Executive Vice President, Chief
Financial Officer and a director of MFS, attended a meeting of the UUNET Board
of Directors to discuss the business of MFS. At this
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meeting, the UUNET Board of Directors determined to continue discussions with
MFS. Mr. Sidgmore then telephoned Mr. Crowe and suggested that both parties
commence financial and legal due diligence.
From April 26 through April 29, MFS and UUNET, together with their legal
and financial advisors, conducted their financial and legal due diligence and
negotiated the terms of the Merger Agreement. During this period, the terms of
the Stock Option Agreement and the MFS Voting Agreement were also negotiated,
which agreements, among other things, provided for the granting of the Option
and the granting by certain stockholders of UUNET of irrevocable proxies in
favor of MFS to vote in favor of the proposed merger and against any proposal
for a merger or other business combination with a third party and the granting
by certain stockholders of MFS of irrevocable proxies in favor of UUNET to vote
in favor of the MFS Share Proposal.
The MFS Board of Directors held a special meeting on April 29, 1996 to
consider the proposed Merger Agreement and the transactions contemplated
thereby, including the proposed consideration to be paid to UUNET stockholders.
At this meeting, members of MFS' senior management, together with MFS' legal
counsel, Willkie Farr & Gallagher, and MFS' financial advisor, Gleacher NatWest,
reviewed with the MFS Board of Directors, among other things, the background of
the proposed Merger, financial analyses of the transaction and the terms of the
Merger Agreement. Representatives of Willkie Farr & Gallagher and Gleacher
NatWest made presentations to the MFS Board of Directors and discussed with the
MFS Board of Directors their views and analyses of various aspects of the
proposed Merger. In addition, at this meeting, Gleacher NatWest delivered its
oral opinion (subsequently confirmed in a written opinion dated as of April 29,
1996) to the MFS Board of Directors that, based upon the matters presented to
the MFS Board of Directors and subject to the matters set forth in its written
opinion, as of such date, the Exchange Ratio is fair from a financial point of
view to MFS and its stockholders. After extensive discussion and consideration,
the MFS Board of Directors approved the Merger Agreement by the unanimous vote
of all directors present (11 of 12 directors) and the transactions contemplated
thereby and authorized the execution of the Merger Agreement and the Stock
Option Agreement.
On April 29, 1996, the UUNET Board of Directors held a special meeting to
consider the proposed Merger Agreement and the transactions contemplated
thereby, including the proposed consideration to be paid to UUNET stockholders.
At this meeting, members of UUNETs senior management, together with UUNET's
legal counsel, Heller Ehrman White & McAuliffe, and UUNET's financial advisor,
Goldman Sachs, reviewed with the UUNET Board of Directors, among other things,
the background of the proposed Merger, UUNETs strategic alternatives, financial
valuation analyses of the transaction and the terms of the Merger Agreement as
well as the other matters discussed below under "--Recommendation of UUNET Board
of Directors; Reasons for the Merger." Representatives of Heller Ehrman White &
McAuliffe also made presentations to the UUNET Board of Directors and discussed
with the UUNET Board of Directors their views and analyses of various aspects of
the proposed Merger. In addition, at this meeting, Goldman Sachs delivered its
opinion to the UUNET Board of Directors that, as of such date, the Exchange
Ratio pursuant to the Merger Agreement was fair to the holders of UUNET Common
Stock. After extensive discussion and consideration, the UUNET Board of
Directors unanimously approved the Merger Agreement and the transactions
contemplated thereby and authorized the execution of the Merger Agreement and
the MFS Voting Agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF UUNET; REASONS FOR THE MERGER
The UUNET Board of Directors believes that the terms of the Merger are fair
to, and in the best interests of, UUNET and the UUNET stockholders and has
unanimously approved the Merger Agreement and the related transactions. The
UUNET Board of Directors unanimously recommends that the UUNET stockholders
approve and adopt the Merger Agreement.
In light of the enhanced competition from major telecommunications
companies in the Internet services industry, the UUNET Board of Directors
evaluated UUNET's strategic position and determined that in order for UUNET to
maintain its leadership position in the industry it needed to augment its
presence through a merger or strategic relationship with a suitable partner.
The UUNET Board of Directors considers a merger with MFS advantageous to UUNET
because: (i) each company has similar needs for domestic and international high
capacity
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fiber optic infrastructure which should ultimately allow them to reduce expenses
through their combined purchasing power; (ii) both companies focus on providing
communications services to business customers and believe that together they
will be able to provide business customers with a single source for a full range
of business communications and Internet services; and (iii) UUNET potentially
could benefit from the efforts of MFS' 1,200-person sales and marketing team
offering UUNET's Internet services.
In reaching its decision to approve the Merger and to recommend that
UUNET's stockholders vote to approve the Merger, the UUNET Board of Directors
also considered, among other things, the following factors, both positive and
potentially negative;
(i) the Board's knowledge of the business, operations, properties, assets,
financial condition and operating results of UUNET;
(ii) the reports and opinions of UUNET's management and Goldman Sachs,
including the result of their due diligence investigations concerning the
business, operations and financial condition of MFS;
(iii) UUNET's future prospects and the likelihood that such prospects
would be enhanced as a result of the Merger;
(iv) the detailed financial analyses, pro forma and other information with
respect to UUNET and MFS presented by Goldman Sachs and the opinion of Goldman
Sachs that the Exchange Ratio pursuant to the Merger Agreement was fair to the
holders of UUNET Common Stock as of the date of such opinion (see "Opinion of
UUNET's Financial Advisor");
(v) the effect on stockholder value of UUNET continuing as an independent
entity compared to the effect of a combination with MFS, in light of the
financial condition and prospects of UUNET and the current economic and industry
environment, including, but not limited to, (A) other possible strategic
alternatives for UUNET which the UUNET Board of Directors had examined,
including continuing to execute its stand-alone business plan, and (B) the
potential for increased value in the combined MFS/UUNET enterprise;
(vi) recent and current market prices of the MFS Common Stock;
(vii) the terms and conditions of the Merger Agreement and the related
documents, which were the product of extensive arm's-length negotiations,
including the fact that the closing of the Merger is not conditioned upon the
failure of a material adverse event to occur with respect to UUNET or MFS after
the signing of the Merger Agreement, but is conditioned upon the MFS
stockholders approving the issuance of shares to the UUNET stockholders pursuant
to the Merger;
(viii) the substantial premium over the recent trading prices of the UUNET
Common Stock represented by the Exchange Ratio;
(ix) the compatibility of the respective business philosophies of MFS and
UUNET;
(x) the opportunity for UUNET stockholders, a majority of whom supported
the Merger by agreeing to execute the Stock Option Agreement, to participate, as
holders of MFS Common Stock, in a larger, more diversified company, and to do so
by means of a transaction which is designed to be tax-free to UUNET's
stockholders;
(xi) the impact of the Merger on the interests of UUNET's customers,
suppliers and employees;
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(xii) the risks that the synergies and cost savings anticipated to be
achieved in the Merger would not be achieved;
(xiii) the risk that the operations of the two companies would not be
successfully integrated;
(xiv) the risk that key technical and management personnel might be lost
prior to or after consummation of the Merger;
(xv) the adverse effects on UUNET's business, operations and financial
condition should it not be possible to consummate the Merger following public
announcement that the Merger Agreement had been entered into; and
(xvi) other risks associated with MFS and UUNET's businesses, including
those described above under "Risks Factors."
The foregoing discussion of the information and factors considered by the
UUNET Board of Directors is not intended to be exhaustive but is believed to
include all material factors considered by the UUNET Board of Directors. In view
of the variety of factors considered in connection with its evaluation of the
Merger, the UUNET Board of Directors did not find it practicable to and did not
quantify or otherwise assign relative weights to the specific factors considered
in reaching its determination. In addition, individual members of the UUNET
Board of Directors may have given different weights to different factors. In the
course of its deliberations, the UUNET Board of Directors did not establish a
range of value for UUNET; however, based on the factors outlined above, the
UUNET Board of Directors determined that the Merger is advisable and fair and in
the best interests of UUNET and its stockholders.
THE UUNET BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
UUNET COMMON STOCK VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of UUNET with
respect to the Merger, holders of UUNET Common Stock should be aware that
certain members of UUNET's management, some of whom are members of the UUNET
Board of Directors, and the members of the UUNET Board of Directors have certain
interests in the Merger, in addition to those of the stockholders generally. The
Board of Directors of UUNET was aware of these interests when it considered and
approved the Merger and the Merger Agreement.
Pursuant to the terms of the Merger Agreement, MFS has agreed to take all
action necessary to cause John W. Sidgmore, President and Chief Executive
Officer of UUNET, Richard L. Adams, Jr., Chairman of the Board of UUNET, and a
third individual designated by UUNET and approved by MFS to become members of
the MFS Board of Directors, subject to the consummation of the Merger. Upon
joining the MFS Board of Directors, Mr. Sidgmore will become a Class I director,
UUNET's third designee will become a Class II director and Mr. Adams will become
a Class III director. In addition, Mr. Sidgmore will remain the President,
Chief Executive Officer and a director of UUNET and will become the Co-President
and Co-Chief Operating Officer of MFS.
MFS has agreed that UUNET may retain Daniel C. Lynch, Les B. Strauss and
Daniel Rosen, each currently a member of the UUNET Board of Directors, as
consultants to UUNET, in each case for at least such period of time that any
nonqualified stock options outstanding on April 29, 1996 held by such
individuals remain subject to vesting or the shares issuable upon exercise of
such options remain subject to UUNET's right of repurchase. The consideration
in each case to such consultants would be the continued vesting of such options
during the term of consultancy.
Pursuant to option and stock purchase agreements between each of various
officers and UUNET, upon consummation of the Merger, the vesting and lapse of
repurchase rights will accelerate with respect to 50% of (a) unvested options
and (b) outstanding shares or shares issuable upon option exercise subject to a
right of repurchase,
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in each case, as of the Effective Date. If as a result of such acceleration, any
officer of UUNET incurs an excise tax pursuant to Section 4999 of the Code or
corresponding provisions of applicable state law, UUNET will pay such officer
when due to the applicable tax authority an amount (the "Transfer") sufficient
to pay (i) the excise tax and (ii) any and all federal, state and local taxes
payable with respect to the receipt of the Transfer. The maximum amount that
UUNET will pay in connection with all Transfers is $4.55 million (the "Cap"),
except that the Cap will be increased if the per share value of UUNET Common
Stock used in determining the amount of the Transfer exceeds $61.33 per share
and/or the interest rate used in determining the amount of the Transfer exceeds
7.5%. If the Cap is exceeded, the officers who would otherwise be entitled to
payment or part or all of the Transfer may (but are not obligated to) disclaim
all or part of the acceleration of vesting of options or shares.
Pursuant to the Merger Agreement, following consummation of the Merger, MFS
will, or will cause UUNET to, honor in accordance with their terms, all
employment, severance and similar agreements to which UUNET or any of its
subsidiaries is a party and all provisions for vested benefits or other vested
amounts earned or accrued through the Effective Date under UUNET's benefit
plans. See "THE MERGER AGREEMENT-Effect on Employee Benefit Plans."
MFS will indemnify and hold harmless directors, officers, and agents of
UUNET as provided in UUNET's Certificate of Incorporation, By-laws or
indemnification agreements, in effect on the date of the Merger Agreement with
respect to matters covered thereby occurring through the Effective Date.
The Merger Agreement provides that the By-laws and the Certificate of
Incorporation of Sub will be amended prior to the Effective Date to contain
indemnification provisions identical to those set forth in the By-laws and
Certificate of Incorporation of UUNET as of April 29, 1996, which provisions
will continue in full force and effect for a period of not less than six years
from the Effective Date. The Merger Agreement provides that, with respect to
matters occurring prior to the Effective Date, MFS will cause UUNET, as the
Surviving Corporation, to maintain directors' and officers' liability insurance
policies as currently maintained by UUNET for three years after the Effective
Date to the extent that such policies are obtainable at an annual cost of not
greater than three times UUNET's last annual premium prior to April 29, 1996;
provided that if such coverage is not available for such amount, UUNET, as the
surviving corporation, will purchase as much coverage as possible for such
amount. See "THE MERGER AGREEMENT-Indemnification."
The Merger Agreement provides that under certain circumstances, MFS will
indemnify and hold harmless each member of UUNET's Board of Directors that has
executed, or whose affiliate or employer executed, a Stock Option Agreement
insofar as any loss, claim, damage, liability or expense arises solely out of,
or is based solely upon, a claim that such Director's fiduciary duty as a member
of UUNET's Board of Directors under Delaware law was breached by the execution
by him or his affiliate or employer, in his or its capacity as a UUNET
stockholder, of the Stock Option Agreement.
RECOMMENDATION OF MFS BOARD OF DIRECTORS OF THE MERGER; REASONS FOR THE MERGER
The MFS Board of Directors believes that the Merger is fair to, and in the
best interests of, MFS and its stockholders. The MFS Board of Directors has
approved the terms of the Merger by a unanimous vote of the directors present
and unanimously recommends that MFS' stockholders vote FOR the MFS Share
Proposal.
The MFS Board of Directors concluded that the Merger is in the best
interests of MFS and its stockholders because, among other reasons, the Merger
would further MFS' strategic objective of becoming the primary provider of
telecommunications services to business and government end-users and would
provide MFS with a strategic opportunity to accelerate the addition of Internet-
related services to its suite of business service offerings. See "SUMMARY-The
Companies-MFS."
The MFS Board of Directors concluded that the Merger will further such
objectives in part because of its belief that: (i) the significant growth of the
Internet as a communications medium has created incremental revenue
opportunities for facilities-based telecommunications service providers; (ii)
UUNET's customer base of businesses is complementary to MFS' customer base;
(iii) UUNET's relationship with Microsoft demonstrates its reputation as
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a leading provider of access to highly complex Internet networks; and (iv) the
combination of MFS and UUNET provides substantial opportunities for operating
synergies and incremental revenues, especially as a result of regulatory changes
mandated by the Telecom Act.
In reaching its conclusions that the Merger is fair to, and in the best
interests of, MFS and its stockholders, the MFS Board of Directors also
considered, among other things, the following factors: (i) its knowledge of the
business, operations, properties, assets, financial condition, operating results
and prospects of MFS and UUNET; (ii) current industry, economic and market
conditions; (iii) presentations by MFS' management and by Gleacher NatWest, MFS'
financial advisors, with respect to UUNET and MFS; (iv) the opinion of Gleacher
NatWest as to the fairness, from a financial point of view, of the Exchange
Ratio to MFS and its stockholders (see "THE MERGER-Opinion of MFS' Financial
Advisor"); (v) the terms of the Merger Agreement (see "THE MERGER AGREEMENT");
(vi) the structure and accounting treatment of the transaction; (vii) the
compatibility of the respective business philosophies of MFS and UUNET; and
(viii) the opportunity for MFS stockholders to participate in a larger, more
diversified company.
In view of the variety of factors considered in connection with its
evaluation of the Merger, the MFS Board of Directors did not find it practicable
to and did not quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination.
OPINION OF UUNET'S FINANCIAL ADVISOR
Goldman Sachs delivered its written opinion to the UUNET Board of Directors
to the effect that as of the date of such opinion, the Exchange Ratio pursuant
to the Merger Agreement was fair to holders of the UUNET Common Stock.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS DATED APRIL 29, 1996,
WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED HERETO AS ANNEX D
TO THIS JOINT PROXY STATEMENT-PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. STOCKHOLDERS OF UUNET ARE URGED TO, AND SHOULD, READ SUCH OPINION IN
ITS ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other things,
(i) the Merger Agreement; (ii) the Annual Report on Form 10-K of UUNET for the
year ended December 31, 1995; (iii) Annual Reports to Stockholders of MFS for
the two years ended December 31, 1994; (iv) Annual Reports on Form 10-K of MFS
for the three years ended December 31, 1995; (v) certain interim reports to
stockholders and Quarterly Reports on Form 10-Q of UUNET and MFS; (vi) the
Registration Statement dated May 25, 1995 relating to the initial public
offering of UUNET Common Stock; (vii) the Proxy Statement dated August 7, 1995
relating to Peter Kiewit Sons, Inc.'s tax-free distribution of all of its
holdings in MFS; (viii) the Prospectus Supplement dated January 18, 1996
relating to 8 7/8% Senior Discount Notes due 2006 of MFS; (ix) certain other
communications from UUNET and MFS to their respective stockholders; and (x)
certain internal financial analyses and forecasts for UUNET and MFS prepared by
their respective managements. Goldman Sachs also held discussions with members
of the senior managements of UUNET and MFS regarding the past and current
business operations, financial condition and future prospects of their
respective companies. Goldman Sachs reviewed with members of the senior
management of UUNET and its outside counsel and accountants the results of
UUNET's due diligence examination of MFS. In addition, Goldman Sachs reviewed
the reported price and trading activity for the UUNET Common Stock and the MFS
Common Stock, compared certain financial and stock market information for UUNET
and MFS with similar information for certain other companies the securities of
which are publicly traded, reviewed the financial terms of certain recent
business combinations in the technology sector generally and the communications
equipment industry specifically, and performed such other studies and analyses
as it considered appropriate.
Goldman Sachs relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by it for
purposes of its opinion. In that regard, Goldman Sachs, assumed, with UUNET's
consent, that the financial forecasts were prepared on a basis reflecting the
best then currently available judgments and estimates of UUNET and MFS and that
such forecasts would be realized in the amounts and at the times contemplated
therein. In addition, Goldman Sachs did not make an independent
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evaluation or appraisal of the assets and liabilities of UUNET or MFS or any of
their respective subsidiaries and Goldman Sachs was not furnished with any such
evaluation or appraisal.
The following is a summary of certain of the financial analyses used by
Goldman Sachs in connection with providing its written opinion, dated as of
April 29, 1996, to UUNET's Board of Directors.
(i) Historical Stock Trading Analysis. Goldman Sachs reviewed the
historical trading prices and volumes for the UUNET Common Stock. In
addition, Goldman Sachs analyzed the consideration to be received by
holders of UUNET Common Stock pursuant to the Merger Agreement in relation
to the market prices of the UUNET Common Stock on April 26, 1996, April 19,
1996, March 26, 1996 and January 26, 1996. Such analysis indicated that the
price per share of UUNET Common Stock to be paid pursuant to the Merger
Agreement (based on the Exchange Ratio of 1.777776 and the implied post-
stock split price of MFS Common Stock of $61.33 as of April 26, 1996)
represented a premium of 37% based on the April 26, 1996 closing market
price of $44.75 per share of UUNET Common Stock, 38% based on the April 19,
1996 closing market price of $44.50 per share of UUNET Common Stock, 144%
based on the March 26, 1996 closing market price of $25.19 per share of
UUNET Common Stock and 31% based on the January 26, 1996 closing market
price of $46.75 per share of UUNET Common Stock. This analysis also showed
that from May 25, 1995 through April 26, 1996 UUNET Common Stock and MFS
Common Stock had traded in a ratio ranging between approximately 2.25 and
0.4 (without adjusting for the MFS 2-for-1 stock split effected on April
26, 1996), with an average ratio over that period of approximately .97
(without adjusting for the MFS 2-for-1 stock split effected on April 26,
1996).
(ii) Selected Companies Analysis. Goldman Sachs reviewed and compared
certain financial information relating to UUNET to corresponding financial
information, ratios and public market multiples for 19 publicly traded
corporations: BBN, NETCOM, PSI, America Online, CompuServe, Yahoo!, Inc.,
Lycos Inc., Open Text Corporation, Secure Computing Corporation, Raptor
Systems Inc., Cylink Corporation, CyberCash Inc., Netscape Communications
Corporation, Premenos Technology Corp., Spyglass Inc., Verity Inc.,
Netmanage Inc., Quarterdeck Office Systems, Inc. and VocalTec Inc. (the
"Selected Companies"). Goldman Sachs calculated and compared various
financial multiples and ratios. The multiples of UUNET were calculated
using a price of $44.75 per share of UUNET Common Stock, the closing price
of the UUNET Common Stock on Nasdaq on April 26, 1996. The multiples and
ratios for UUNET and for each of the Selected Companies were based on the
most recent publicly available information. With respect to the Selected
Companies, Goldman Sachs considered market capitalization as a multiple of
estimated 1996 and 1997 revenues. Goldman Sachs' analyses of the Selected
Companies indicated multiples of estimated revenues, which ranged from 2.6x
to 331.2x for 1996 and ranged from 1.3x to 32.6x for 1997, compared to
multiples of 8.4x and 3.2x, respectively, for UUNET. Goldman Sachs also
considered, for the Selected Companies, estimated 1996 and 1997
price/earnings ratios, which ranged from 16.5x to 695.0x for 1996 and 10.9x
to 150.6x for 1997 compared to 223.8x and 89.5x, respectively, for UUNET;
and a five-year Earnings Per Share ("EPS") growth rate (provided by
Institutional Brokers Estimate System ("IBES")) ranging from 20.0% to 90.0%
compared to 50.0% for UUNET.
(iii) Discounted Cash Flow Analysis. Goldman Sachs performed a
discounted cash flow analysis under the following two scenarios: (a) using
UUNET's management projections and a price/earnings methodology (the "PE
Case") and (b) using UUNET's management projections using an Earnings
Before Income Taxes, Depreciation and Amortization ("EBITDA") methodology
(the "EBITDA Case"). Goldman Sachs analyzed the PE Case and the EBITDA
Case over a five year period (the "Five Year Period") and a three year
period (the "Three Year Period"). Goldman Sachs calculated a net present
value of free cash flows for the years 1996 through 2000 in the Five Year
Period and for the years 1996 through 1998 in the Three Year Period using
discount rates ranging from 20% to 30%. Goldman Sachs calculated UUNET's
terminal
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values in the year 2000 based on multiples ranging from 10.0x EBITDA to
14.0x EBITDA in the EBITDA Case for the Five Year Period, 12.0x EBITDA to
16.0x EBITDA in the EBITDA Case for the Three Year Period, 15.0x net income
to 25.0x net income in the PE Case for the Five Year Period and 20.0x net
income to 30.0x for the Three Year Period. These terminal values were then
discounted to present value using discount rates from 20.0% to 30.0%. Based
on such analysis the implied per share values ranged from $30 to $65 in the
EBITDA Case for the Five Year Period, from $23 to $42 in the EBITDA Case
for the Three Year Period, from $28 to $75 in the PE Case for the Five Year
Period and from $22 to $45 in the PE Case for the Three Year Period.
(iv) Selected Transactions Analysis. Goldman Sachs analyzed certain
information relating to selected transactions in the technology industry
since 1994 (the "Selected Technology Transactions") and in the
communications equipment industry since 1993 (the "Selected Communications
Transactions"). Such analyses indicated that for the Selected Technology
Transactions the premium paid over market price for the day (i) prior to
announcement ranged from negative 5.8% to 138.3% with a mean of 35.3% and a
median of 33.6% in the Selected Technology Transactions and ranged from
1.9% to 70.0% with a mean of 30.6% and a median of 25.2% in the Selected
Communications Transactions compared to a premium of 37% over the closing
market price of the UUNET Common Stock on April 26, 1996, (ii) one week
prior to the announcement ranged from negative 5.8% to 138.3% with a mean
of 41.9% and a median of 35.3% in the Selected Technology Transactions and
ranged from 11.7% to 71.4% with a mean of 40.9% and a median of 40.0% in
the Selected Communications Transactions compared to 38% over the closing
market price of the UUNET Common Stock on April 19, 1996 and (iii) 30
days prior to the announcement ranged from negative 9.9% to 103.2% with a
mean of 47.5% and a median of 45.8% in the Selected Technology Transactions
and ranged from 13.8% to 103.6% with a mean of 52.6% and a median of 52.4%
in the Selected Communications Transactions compared to 144% over the
closing market price of the UUNET Common Stock on March 26, 1996.
(v) Pro Forma Merger Analysis. Goldman Sachs prepared pro forma
analyses of the financial impact of the Merger. Using earnings estimates
for UUNET and MFS prepared by their respective managements for the years
1996 and 1997, Goldman Sachs compared the EPS of the UUNET Common Stock, on
a standalone basis, to the EPS of the common stock of the combined
companies on a pro forma basis. Goldman Sachs performed this analysis
based on a transaction value of $61.33 per share of UUNET Common Stock.
Such analyses indicated that the proposed transaction would be
significantly dilutive to UUNET's stockholders on an EPS basis in the years
1996 and 1997, as MFS is not projected to have positive net income in
either year.
(vi) Contribution Analysis. Goldman Sachs reviewed historical and
estimated future revenues and EBITDA for UUNET and MFS based on UUNET and
MFS managements' financial forecasts for their respective companies. The
analysis indicated that the UUNET stockholders would contribute 14%, 21%,
28% and 34%, to the combined company's revenues in 1995, 1996, 1997 and
1998, respectively and 35% and 30%, to the combined company's EBITDA in
1997 and 1998, respectively.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all such analyses. No company or
transaction used in the above analyses as a comparison is directly comparable to
UUNET or MFS or the contemplated transaction. The analyses were prepared solely
for purposes of Goldman Sachs providing its opinion to the UUNET Board of
Directors as to the fairness of the Exchange Ratio pursuant to the Merger
Agreement and do not purport to be appraisals or necessarily reflect the prices
at which businesses or securities actually may be sold. Analyses based upon
forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the parties or
their respective advisors, none of UUNET, MFS, Goldman Sachs or any other person
assumes responsibility if future results are materially different from those
forecast. As described above, Goldman Sachs' opinion to the UUNET Board of
Directors was one of many factors taken into consideration by the UUNET Board of
Directors in making its determination to approve the Merger Agreement. The
foregoing summary does not purport to be a complete description of the analysis
performed by Goldman Sachs and is qualified by reference to the written opinion
of Goldman Sachs set forth in Annex D hereto.
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Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bidding,
secondary distributions of listed and unlisted securities, private placements,
and valuations for estate, corporate and other purposes. UUNET selected Goldman
Sachs as its financial advisor because it is a nationally recognized investment
banking firm that has substantial experience in transactions similar to the
Merger, as well as Goldman Sachs' prior investment banking relationship with
UUNET.
Goldman Sachs provides a full range of financial, advisory and brokerage
services and in the course of its normal trading activities may from time to
time effect transactions and hold positions in the securities or options on
securities of UUNET and/or MFS for its own account and for the account of
customers. [As of the date hereof, Goldman Sachs holds for its own account [has
a long position of ________ UUNET Common Stock and a short position of ________
MFS Common Stock.]]
Pursuant to a letter agreement dated March 24, 1996 (the "Engagement
Letter"), UUNET engaged Goldman Sachs to act as its financial advisor in
connection with the possible sale of all or a portion of UUNET. Pursuant to the
terms of the Engagement Letter, UUNET has agreed to pay Goldman Sachs upon
consummation of the Merger a transaction fee based on 0.55% of the total
consideration paid for the UUNET Common Stock (including amounts paid to holders
of vested options, calculated using the treasury stock method). UUNET has
agreed to reimburse Goldman Sachs for its reasonable out-of-pocket expenses,
including attorneys' fees and disbursements, and to indemnify Goldman Sachs
against certain liabilities, including certain liabilities under the federal
securities laws.
OPINION OF MFS' FINANCIAL ADVISOR
MFS retained Gleacher NatWest to act as MFS' financial advisor in
connection with the Merger and related matters based upon its qualifications,
expertise and reputation, as well as Gleacher NatWest's prior investment banking
relationship and familiarity with MFS. At the April 29, 1996 meeting of the MFS
Board of Directors, Gleacher NatWest delivered a written opinion to the MFS
Board of Directors to the effect that, as of such date, the Exchange Ratio
offered by MFS to UUNET stockholders is fair from a financial point of view to
MFS and its stockholders.
THE FULL TEXT OF GLEACHER NATWEST'S OPINION, WHICH SETS FORTH, AMONG OTHER
THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED, AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX E TO THIS JOINT PROXY
STATEMENT-PROSPECTUS. MFS STOCKHOLDERS ARE URGED TO READ THE GLEACHER NATWEST
OPINION CAREFULLY AND IN ITS ENTIRETY. THE SUMMARY OF THE OPINION OF GLEACHER
NATWEST SET FORTH IN THIS JOINT PROXY STATEMENT-PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
GLEACHER NATWEST'S OPINION IS ADDRESSED TO THE MFS BOARD OF DIRECTORS AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF MFS CAPITAL STOCK AS TO
HOW SUCH STOCKHOLDER SHOULD VOTE AT THE MFS MEETING.
In connection with rendering its opinion, Gleacher NatWest, among other
things: (i) analyzed the historical publicly filed financial statements of
UUNET and MFS; (ii) discussed the past and current operations, the financial
condition and the prospects of UUNET with the management of MFS and the
management of UUNET, and reviewed with the management of MFS its due diligence
of UUNET; (iii) reviewed with the management of MFS certain business plans of
MFS, certain projections prepared by and pertaining to UUNET, certain financial
projections concerning UUNET prepared by the management of MFS and certain
estimates of financial synergies occurring from the business combination
resulting from the merger as prepared by MFS; (iv) reviewed the historical
market prices and reported trading volumes of MFS Common Stock and UUNET Common
Stock; (v) compared the financial performance of UUNET with, and reviewed the
prices and reported trading activity of the securities of, certain publicly
traded companies whose operating characteristics and/or industry focus resemble
those of UUNET; (vi) reviewed the financial terms of selected precedent
transactions of publicly traded companies with high projected growth rates;
(vii) performed a discounted cash flow analysis of UUNET based upon public
estimates and the financial information provided to it as referred to above; and
(viii) reviewed such other information and performed such other analyses as it
deemed appropriate.
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In rendering its opinion, Gleacher NatWest assumed and relied upon, without
assuming responsibility for independent verification, the accuracy and
completeness of the information reviewed by it. With respect to the financial
projections provided to it, Gleacher NatWest assumed that they have been
reasonably prepared and reflect the best currently available estimates and
judgments of the senior management of MFS and UUNET as to the future financial
performance of MFS and UUNET. Gleacher NatWest also assumed based upon the
information which had been provided to it and without assuming responsibility
for independent verification thereof that no material undisclosed or contingent
liability exists with respect to MFS or UUNET. Gleacher NatWest's opinion is
based necessarily on the economic, market, and other conditions as in effect on
the date of its opinion, and the information made available to it.
The following is a summary of the analyses presented by Gleacher NatWest to
the MFS Board of Directors on April 29, 1996 in connection with rendering its
opinion.
Transaction Summary. Gleacher NatWest reviewed the principal terms of the
proposed transaction, noting that it is based upon an exchange ratio of 1.777776
shares (as adjusted for the MFS 2-for-1 stock split effective April 26, 1996) of
MFS Common Stock for each outstanding share of UUNET Common Stock. Gleacher
NatWest explained that based upon MFS' closing stock price of $34.50 (as
adjusted for the stock split) on April 26, 1996, each UUNET stockholder would
receive $61.33 in value, representing a 37% premium to the UUNET closing stock
price of $44.75 on April 26, 1996.
Comparable Company Analysis. Gleacher NatWest reviewed the relative
performance and value of UUNET by comparing certain market trading statistics
for UUNET with the following five companies whose operating characteristics
and/or industry focus resemble those of UUNET: Netscape Communications
Corporation, PSI, NETCOM, Verity, Inc. and Spyglass, Inc. (the "Comparables").
Market information used in ratios provided below is as of April 26, 1996, except
for in the case of UUNET, which is valued at a price based on MFS' closing stock
price on April 26, 1996 multiplied by the exchange ratio of 1.777776 shares.
This analysis showed that the ratio of aggregate market value to revenues from
the most recent quarter multiplied by four (the "LQA revenues") was 11.4x for
UUNET compared to 13.9x in the case of the median of a range of multiples from
2.4x to 21.7x for the Comparables, and that the ratio of aggregate market value
to revenues estimates for 1996 and 1997 was 8.0x and 4.2x, respectively for
years 1996 and 1997, for UUNET compared to 12.2x and 8.2x in the case of the
median of a range of multiples ranging from 1.9x to 18.1x for 1996 estimated
revenues, and 0.9x to 12.3x for 1997 estimated revenues for the Comparables, in
each case based upon estimates of various equity research analysts.
Gleacher NatWest also reviewed the 5-year projected earnings growth rate of
UUNET and the Comparables. Based upon Institutional Brokers Estimate System
("IBES") estimates as of April 18, 1996, UUNET's projected growth was 70%
compared to 50% in the case of the median of a range of projected growth rates
from 50% to 90% for the Comparables. IBES is a data service that monitors and
publishes compilations of earnings estimates produced by selected research
analysts regarding companies of interest to institutional shareholders.
Comparable Transaction Analysis. Gleacher NatWest reviewed the premiums
paid for certain selected high-growth, technology companies in transactions with
a value of over $700 million. Target projected growth rates, premiums paid to
target price one week prior to announcement, multiples of LQA revenues and
multiples of LQA revenues relative to growth rate implied by the consideration
to be received by stockholders of UUNET in the Merger were compared with growth
rates, premiums paid, and multiples paid in other comparable merger transactions
from 1994 through April 22, 1996. The comparison included a total of six
transactions. The transactions examined were (target/acquiror): StrataCom/Cisco
Systems; Sierra On-Line/CUC International; Davidson & Associates/CUC
International; Tivoli Systems/IBM; NexGen/Advanced Micro Devices; and
Powersoft/Sybase. The analysis showed a target projected growth rate for the
comparables of 34%, compared to 70% for UUNET. The median of the premiums paid
to target price was 32% (in a range of 2% to 56%) for the comparable
transactions, compared to 38% for the Merger, based on an MFS share price of
$34.50. In terms of the LQA multiple of revenues, the median for the comparables
was 7.9x (in a range of 3.4x to 13.0x), compared to 11.4x for the Merger. In
terms of the LQA revenues multiple relative to projected growth rates implied by
the transaction, the median for the comparables was 20.6 (in a range of 12.2 to
43.5), compared to 16.2 for the Merger.
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No company or transaction used in the comparable company and comparable
transaction analyses is identical to UUNET or the Merger. Accordingly, an
analysis of the results of the foregoing necessarily involves complex
considerations and judgments concerning differences in financial and operating
characteristics of UUNET and other factors that could affect the public trading
value of the companies to which they are being compared. Mathematical analysis
(such as determining the average or median) is not in itself a meaningful method
of using comparable transaction data or comparable company data.
Discounted Cash Flow Analysis. Gleacher NatWest performed a discounted
cash flow analysis to calculate the present value per share of UUNET using
financial projections for UUNET through 2000 that reflected a compounded
earnings growth rate in line with the consensus analyst estimates of 70%.
Gleacher NatWest utilized a discount rate of 20.0% and earnings before interest,
taxes, depreciation and amortization ("EBITDA") terminal value multiples ranging
from 12.0x to 14.0x to apply to forecasted EBITDA for the year 2000. This
analysis showed a range of present values from $55 to $63 per share for UUNET
assuming no synergies. The analysis showed a range of present values from $70 to
$80 per share for UUNET assuming operating cost synergies and incremental
revenue flow from a phased-in co-carrier environment (based on MFS management
estimates). This analysis did not purport to be indicative of actual values or
expected values of the shares of UUNET Common Stock before or after the Merger.
Pro Forma Analysis of the Merger. Gleacher NatWest analyzed the pro forma
effect of the Merger on MFS' revenues and revenue growth rate, EBITDA, and
leverage ratio. This analysis assumed that the Merger would completed on August
1, 1996. Such analysis was based on historical and estimated revenues and EBITDA
for fiscal years ended 1995 through 1998 for MFS and UUNET. The estimates for
MFS were prepared by MFS management, and estimates for UUNET assumed a
compounded earnings growth rate in line with the consensus analyst estimates of
70%. This analysis showed that, based upon such projections, the Merger would
result over the analysis period in an increase in the pro forma MFS revenue
growth rate. Gleacher NatWest also noted that based upon such projections the
Merger would allow MFS to report positive EBITDA earlier than currently expected
and to reduce MFS' ratio of total debt to book capitalization.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Gleacher
NatWest believes that its analyses must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, would
create an incomplete view of the process underlying its opinion and the
presentation to the MFS Board of Directors. In addition, Gleacher NatWest may
have given various analyses more or less weight than other analyses, and may
have deemed various assumptions more or less probable than other assumptions, so
that the ranges of valuations resulting from any particular analysis described
above should not be taken to be Gleacher NatWest's view of the actual value of
UUNET.
In performing its analyses, Gleacher NatWest made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of MFS or UUNET. The
analyses performed by Gleacher NatWest are not necessarily indicative of actual
values, which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as a part of Gleacher NatWest's
analysis of the fairness of the Exchange Ratio to MFS and its stockholders and
were provided to the MFS Board of Directors in connection with the delivery of
Gleacher NatWest's opinion. The analyses do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities might actually
be sold, which are inherently subject to uncertainty. In addition, as described
above, Gleacher NatWest's opinion and presentation to the MFS Board of Directors
was one of many factors taken into consideration by the MFS Board of Directors
in making its determination to approve the Merger. Consequently, the Gleacher
NatWest analyses described above should not be viewed as determinative of the
MFS Board of Directors' or MFS management's opinion with respect to the value of
UUNET.
Gleacher NatWest is an internationally recognized investment banking and
advisory firm that regularly engages in the valuation of businesses and their
securities in connection with mergers and acquisitions.
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In the past, Gleacher NatWest and its affiliates have provided financial
advisory services to MFS. Pursuant to an engagement letter dated June 8, 1993,
MFS agreed to pay Gleacher NatWest a fee in the form of warrants to acquire 1.5
million shares of MFS Common Stock at a stock price of $13.125 for all advisory
services rendered during the period from June 8, 1993 to June 8, 1996. MFS also
agreed to sell 72,000 shares of MFS Common Stock to Gleacher NatWest at a price
equal to $11.15 per share (representing 85% of the closing per share price of
$13.125 on June 7, 1993). Upon completion of the transaction, MFS will also pay
Gleacher NatWest a cash fee of $1.0 million. In addition, MFS has agreed, among
other things, to reimburse Gleacher NatWest for all reasonable out-of-pocket
expenses incurred in connection with the services provided by Gleacher NatWest,
and to indemnify and hold harmless Gleacher NatWest and certain related parties
from and against certain liabilities and expenses, including certain liabilities
under the federal securities laws, in connection with its engagement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL INFORMATION ONLY.
IT DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN TAX ASPECTS OF THE MERGER. IN
ADDITION, IT DOES NOT DISCUSS THE FEDERAL INCOME TAX CONSIDERATIONS THAT MAY BE
RELEVANT TO CERTAIN PERSONS, INCLUDING HOLDERS OF OPTIONS OR WARRANTS, AND MAY
NOT APPLY TO CERTAIN HOLDERS SUBJECT TO SPECIAL TAX RULES, INCLUDING DEALERS IN
SECURITIES AND FOREIGN HOLDERS. THE DISCUSSION IS BASED UPON CURRENTLY EXISTING
PROVISIONS OF THE CODE, EXISTING TREASURY REGULATIONS THEREUNDER AND CURRENT
ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO
CHANGE AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF THIS
DISCUSSION.
EACH HOLDER OF UUNET COMMON STOCK SHOULD CONSULT SUCH HOLDER'S OWN TAX
ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH
HOLDER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX
LAWS.
It is a condition to the consummation of the Merger that UUNET receive an
opinion from Heller Ehrman White & McAuliffe and that MFS receive an opinion
from Skadden, Arps, Slate, Meagher & Flom to the effect that, based upon the
facts, representations and assumptions set forth in such opinions, the Merger
will constitute a "reorganization" within the meaning of Section 368(a) of the
Code. The opinions will be based in part upon certain representations and
assumptions, including a representation to the effect that as of the Effective
Date, there will be no plan or intention on the part of the UUNET stockholders
to sell, exchange, transfer by gift or otherwise dispose of more than 50% of the
shares of MFS Common Stock received in the Merger.
The following are material federal income tax consequences of the Merger:
(i) no gain or loss will be recognized by the stockholders of UUNET
upon their receipt of MFS Common Stock in exchange for their UUNET Common
Stock, except that stockholders who receive cash proceeds for fractional
interests in MFS Common Stock will recognize gain or loss equal to the
difference between such proceeds and the tax basis allocated to their
fractional share interests, and such gain or loss will constitute capital
gain or loss, assuming that the stockholder holds the UUNET Common Stock as
a capital asset at the Effective Date;
(ii) the tax basis of the shares of MFS Common Stock received by the
stockholders of UUNET will equal the tax basis of their UUNET Common Stock
exchanged therefor (less any portion of such basis allocable to any
fractional interest in any share of MFS Common Stock);
(iii) the holding period of the MFS Common Stock in the hands of the
UUNET stockholders will include the holding period of their UUNET Common
Stock exchanged therefor, assuming that the stockholder holds UUNET Common
Stock as a capital asset at the Effective Date; and
(iv) no gain or loss will be recognized by MFS, UUNET or Sub in the
Merger.
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The opinions of counsel are not binding upon the Internal Revenue Service
("IRS"), and the IRS or a court may disagree with the conclusions set forth
above. In addition, if any of the facts, representations or assumptions which
form the basis for such opinions are not correct, the conclusions reached in
such opinions may not apply and the Merger could be treated as a taxable
exchange by UUNET stockholders of their shares of UUNET Common Stock for shares
of MFS Common Stock.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase for accounting and financial
reporting purposes. Under the purchase method of accounting, the purchase price
of UUNET, including direct costs of the Merger, will be allocated to the assets
acquired and liabilities assumed based upon their estimated relative fair
values, with the excess purchase consideration allocated to goodwill. The
results of MFS' operations will include the results of operations of UUNET
commencing at the Effective Date.
The Unaudited Pro Forma Combined Condensed Financial Statements describing
the pro forma effects of the Merger appearing elsewhere in this Joint Proxy
Statement-Prospectus are based upon certain assumptions and allocate the
purchase price to assets and liabilities based upon preliminary estimates of
their respective fair values. The unaudited pro forma adjustments and combined
amounts are included for informational purposes only. If the Merger is
consummated, MFS' financial statements will reflect the effects of acquisition
adjustments only from the Effective Date. The actual allocation of the purchase
price may differ significantly from the allocation reflected in the Unaudited
Pro Forma Combined Condensed Financial Statements.
CERTAIN LEGAL MATTERS
Except as set forth below, no federal or state regulatory requirements or
approvals (other than those that arose in connection with the registration of
MFS Common Stock to be issued in the Merger and the effectiveness of this Joint
Proxy Statement-Prospectus, which have already been obtained, and certain notice
filings after the Effective Date) must be complied with or obtained in
connection with the Merger.
Pursuant to the requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), UUNET, MFS and certain
stockholders of UUNET have filed Notification and Report Forms for review under
the HSR Act with the Federal Trade Commission (the "FTC") and the Antitrust
Division of the Department of Justice (the "Antitrust Division").
The FTC and the Antitrust Division frequently scrutinize the legality of
transactions such as the Merger under the antitrust laws. At any time before or
after the Effective Date, the FTC or the Antitrust Division could take such
action under the antitrust laws as it deems necessary or desirable in the public
interest, including seeking to enjoin the Merger or seeking the divestiture of
substantial assets of MFS, UUNET or their respective subsidiaries. State
Attorneys General and private parties may also bring legal actions under the
federal or state antitrust laws under certain circumstances. Based upon an
examination of information available to UUNET and MFS relating to the businesses
in which MFS, UUNET and their respective subsidiaries are engaged, UUNET and MFS
believe that the consummation of the Merger will not violate the antitrust laws.
Nevertheless, there can be no
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assurance that a challenge to the proposed Merger on antitrust grounds will not
be made or, if such a challenge is made, that UUNET and MFS will prevail.
Consummation of the Merger is conditioned upon, among other things, the absence
of any preliminary or permanent injunction or other order issued by any federal
or state court in the United States which prevents the consummation of the
Merger.
FEDERAL SECURITIES LAW CONSEQUENCES
All MFS Common Stock issued in connection with the Merger will be freely
transferable, except that any MFS Common Stock received by persons who are
deemed to be "affiliates" (as such term is defined under the Securities Act) of
UUNET or MFS prior to the Merger may be sold by them only in transactions
permitted by the resale provisions of Rule 145 under the Securities Act with
respect to affiliates of UUNET, or Rule 144 under the Securities Act with
respect to persons who are or become affiliates of MFS, or as otherwise
permitted under the Securities Act. Persons who may be deemed to be affiliates
of UUNET or MFS generally include individuals or entities that control, are
controlled by, or are under common control with, such party and may include
certain officers and directors of such party as well as principal stockholders
of such party.
Affiliates may not sell their shares of MFS Common Stock acquired in
connection with the Merger, except pursuant to an effective registration under
the Securities Act covering such shares or in compliance with Rule 145 (or Rule
144 under the Securities Act in the case of persons who become affiliates of
MFS) or another applicable exemption from the registration requirements of the
Securities Act. In general, under Rule 145, for two years following the
Effective Date an affiliate (together with certain related persons) would be
entitled to sell shares of MFS Common Stock acquired in connection with the
Merger only through unsolicited "broker transactions" or in transactions
directly with a "market maker," as such terms are defined in Rule 144.
Additionally, the number of shares to be sold by an affiliate (together with
certain related persons and certain persons acting in concert) within any three-
month period for purposes of Rule 145 may not exceed the greater of 1% of the
outstanding shares of MFS Common Stock or the average weekly trading volume of
such stock during the four calendar weeks preceding such sale. Rule 145 would
only remain available, however, to affiliates if MFS remained current with its
informational filings with the Commission under the Exchange Act. Two years
after the Effective Date, an affiliate would be able to sell such MFS Common
Stock without such manner of sale or volume limitations provided that MFS was
current with its Exchange Act informational filings and such affiliate was not
then an affiliate of MFS. Three years after the Effective Date, an affiliate
would be able to sell such shares of MFS Common Stock without any restrictions
so long as such affiliate had not been an affiliate of MFS for at least three
months prior thereto. See "THE MERGER AGREEMENT-Covenants."
LISTING
It is a condition to the Merger that the shares of MFS Common Stock to be
issued in connection with the Merger be authorized for listing on Nasdaq,
subject to official notice of issuance.
APPRAISAL RIGHTS
UNDER THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE, THE HOLDERS OF
UUNET COMMON STOCK AND MFS CAPITAL STOCK ARE NOT ENTITLED TO ANY APPRAISAL
RIGHTS WITH RESPECT TO THE MERGER.
CERTAIN EFFECTS OF THE STOCK OPTION AGREEMENT AND TERMINATION FEE
As a condition to entering into the Merger Agreement, MFS required certain
stockholders of UUNET to enter into the Stock Option Agreement pursuant to which
such stockholders' (i) agreed to vote their shares of UUNET Common Stock in
favor of the approval of the Merger Agreement and against any proposal for any
recapitalization, merger (other than the Merger), sale of assets or other
business combination between UUNET and any person or entity (other than MFS or
Sub) or any other action or agreement that would result in a breach of the
Merger Agreement or result in any condition of the Merger Agreement not being
fulfilled, (ii) granted irrevocable proxies in favor of MFS and Sub to so vote
their shares, and (iii) issued to MFS an Option to purchase, such stockholders'
shares of
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UUNET Common stock held on the UUNET Record Date and the date of exercise of the
Option, respectively (equal to approximately ____% or _______ shares, of the
issued and outstanding shares of UUNET Common Stock as of the UUNET Record Date)
for the Exchange Ratio. The Option may only be exercised upon the occurrence of
certain events, which generally relate to, or are designed to culminate in, the
acquisition of control of, or a significant equity interest in or significant
assets of, UUNET by a third party. See "THE STOCK OPTION AGREEMENT."
Certain aspects of the Stock Option Agreement, as well as certain aspects
of the $60 million termination fee payable by UUNET provided for in the Merger
Agreement, may have the effect of discouraging persons who might now or prior to
the consummation of the Merger be interested in acquiring all of or a
significant interest in UUNET from considering or proposing such an acquisition.
See "THE MERGER AGREEMENT-Termination; Fees and Expenses" and "THE STOCK OPTION
AGREEMENT-Exercise of the Option."
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THE MERGER AGREEMENT
The following description of the Merger Agreement is necessarily a summary
thereof and is therefore qualified in its entirety by reference to the Merger
Agreement, a copy of which is attached to this Joint Proxy Statement-Prospectus
as Annex A and incorporated herein by reference. Stockholders of UUNET and MFS
are urged to read the Merger Agreement in its entirety.
THE MERGER
The Merger Agreement provides that, subject to the approval of the Merger by
the stockholders of UUNET and the approval of the MFS Share Proposal by the
stockholders of MFS and the satisfaction or waiver of the other conditions to
the Merger, Sub will be merged with and into UUNET in accordance with Delaware
law, whereupon the separate existence of Sub will cease and UUNET will be the
Surviving Corporation of the Merger. On the Effective Date, the conversion of
UUNET Common Stock and the conversion of shares of the common stock of Sub
pursuant thereto will be effected as described below. The Certificate of
Incorporation and By-laws of the Surviving Corporation will be amended and
restated in their entirety to read as the Certificate of Incorporation and By-
laws of Sub, as amended pursuant to the terms of the Merger Agreement. The
directors of Sub immediately prior to the Effective Date, John W. Sidgmore, and
Richard L. Adams, Jr. will become the directors of the Surviving Corporation and
the officers of UUNET immediately prior to the Effective Date will be the
officers of the Surviving Corporation, in each case until their respective
successors are duly elected and qualified.
EFFECTIVE DATE
Following the adoption of the Merger Agreement and the MFS Share Proposal
and subject to satisfaction or waiver of certain terms and conditions, including
conditions to closing, contained in the Merger Agreement, the Merger will become
effective on such date as the Certificate of Merger is duly filed with the
Secretary of State of Delaware or at such time thereafter as is provided in such
Certificate. The filing of the Certificate of Merger will be made as soon as
practicable after all conditions contemplated by the Merger Agreement have been
satisfied or waived.
TERMS OF THE MERGER
At the Effective Date:
(i) each share of UUNET Common Stock held by UUNET or any subsidiary
of UUNET or held by MFS, Sub or any other subsidiary of MFS on the
Effective Date will be canceled, and no payment will be made with respect
thereto;
(ii) each remaining outstanding share of UUNET Common Stock will be
converted into and represent the right to receive 1.777776 shares of MFS
Common Stock, with cash in lieu of fractional shares. Each share of new
MFS Common Stock issued in connection with the Merger will be accompanied
by one MFS Right; and
(iii) each issued and outstanding share of the capital stock of Sub
will be converted into and represent one fully paid and nonassessable share
of common stock, par value $0.01 per share, of the Surviving Corporation.
As of the Effective Date, present holders of UUNET Common Stock will cease
to have any rights as holders of such shares, but will have the rights of
holders of MFS Common Stock. After the Effective Date, the stock transfer books
of UUNET will be closed and there will be no further transfers of UUNET Common
Stock. See "THE MERGER-Conversion of Shares;" "-Procedures for Exchange of
Certificates;" and "COMPARISON OF STOCKHOLDER RIGHTS."
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FRACTIONAL SHARES
Fractional shares of MFS Common Stock will not be issued in connection with
the Merger. In lieu of any such fractional share, each holder of UUNET Common
Stock who would otherwise have been entitled to a fraction of a share of MFS
Common Stock upon surrender of certificates for exchange will be paid cash
(without interest) in an amount equal to such holder's proportionate interest in
the net proceeds from the sale or sales in the open market by the Exchange
Agent, on behalf of all such holders, of the aggregate fractional MFS Common
Stock issued pursuant to the Merger Agreement. As soon as practicable following
the Effective Date, the Exchange Agent will determine the excess of (i) the
number of full shares of MFS Common Stock delivered to the Exchange Agent by MFS
over (ii) the aggregate number of full shares of MFS Common Stock to be
distributed to holders of UUNET Common Stock (the "Excess MFS Shares"), and the
Exchange Agent, as agent for the former holders of UUNET Common Stock, will sell
the Excess MFS Shares at the prevailing prices on Nasdaq. The Exchange Agent
will deduct from the proceeds of the sale of the Excess MFS Shares all
commissions and transfer taxes incurred in connection with such sale of Excess
MFS Shares. Until the net proceeds of such sale have been distributed to the
former stockholders of UUNET, the Exchange Agent will hold such proceeds in
trust for such former stockholders. As soon as practicable after the
determination of the amount of cash to be paid to former stockholders of UUNET
in lieu of any fractional interests, the Exchange Agent will make available such
amounts to such former stockholders.
SURRENDER AND PAYMENT
The Merger Agreement provides that prior to the Effective Date, MFS will
appoint Continental Stock Transfer & Trust to act as the Exchange Agent for the
Merger. On the Effective Date, MFS will make available, and each holder of
UUNET Common Stock will be entitled to receive, upon surrender to the Exchange
Agent of one or more certificates representing UUNET Common Stock for
cancellation, certificates representing the number of shares of MFS Common Stock
into which such shares are converted in the Merger and cash in consideration of
fractional shares, as described above. MFS Common Stock into which UUNET Common
Stock will be converted in the Merger will be deemed to have been issued at the
Effective Date.
No dividends or other distributions that are declared or made on MFS Common
Stock will be paid to persons entitled to receive certificates representing MFS
Common Stock until such persons surrender their certificates representing UUNET
Common Stock. Upon such surrender, there will be paid to the person in whose
name the certificates representing such MFS Common Stock will be issued any
dividends or other distributions which will have become payable with respect to
such MFS Common Stock in respect of a record date after the Effective Date. In
no event will the person entitled to receive such dividends be entitled to
receive interest on such dividends. In the event that any certificates
representing shares of MFS Common Stock are to be issued in a name other than
that in which the certificates representing shares of UUNET Common Stock
surrendered in exchange therefore are registered, it is a condition of such
exchange that the certificate or certificates so surrendered be properly
endorsed or be otherwise in proper form for transfer and that the person
requesting such exchange pay to the Exchange Agent any transfer or other taxes
required by reason of the issuance of certificates for such shares of MFS Common
Stock in a name other than that of the registered holder of the certificate
surrendered, or establish to the satisfaction of the Exchange Agent that such
tax has been paid or is not applicable. Notwithstanding the foregoing, neither
MFS nor UUNET will be liable to any holder of shares of UUNET Common Stock for
any such shares of UUNET Common Stock (or dividends or distributions with
respect thereto) or cash delivered to a public official pursuant to any
abandoned property, escheat or similar law, rule, regulation, statute, order,
judgment or decree.
DETAILED INSTRUCTIONS, INCLUDING A TRANSMITTAL LETTER, WILL BE MAILED TO
HOLDERS OF UUNET COMMON STOCK PROMPTLY FOLLOWING THE EFFECTIVE DATE AS TO THE
METHOD OF EXCHANGING CERTIFICATES FORMERLY REPRESENTING SHARES OF UUNET COMMON
STOCK FOR CERTIFICATES REPRESENTING SHARES OF MFS COMMON STOCK. SEE "THE MERGER-
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES." STOCKHOLDERS OF
UUNET SHOULD NOT SEND CERTIFICATES REPRESENTING THEIR SHARES TO UUNET OR TO THE
EXCHANGE AGENT PRIOR TO RECEIPT OF THE TRANSMITTAL LETTER.
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STOCK OPTIONS AND STOCK PURCHASE PLAN
At or prior to the Effective Date, UUNET and MFS will take all action
necessary to cause the assumption by MFS as of the Effective Date of the options
to purchase UUNET Common Stock, whether vested or unvested, issued under UUNET's
1995 Performance Option Plan, Incentive Stock Option Plan, Equity Incentive Plan
and Nonemployee Directors Stock Option Plan (the "Stock Option Plans") or
pursuant to separate option agreements outstanding as of the Effective Date
(collectively, the "Outstanding Options"). Each of the Outstanding Options will
be converted without any action on the part of the holder thereof into an option
to purchase shares of MFS Common Stock as of the Effective Date. The number of
shares of MFS Common Stock that the holder of an assumed Outstanding Option will
be entitled to receive upon the exercise of such option will be a number of
whole shares determined by multiplying the number of shares of UUNET Common
Stock subject to such option, determined immediately before the Effective Date,
by the Exchange Ratio. The option price of each share of MFS Common Stock
subject to an Outstanding Option will be the amount (rounded up to the nearest
whole cent) obtained by dividing the exercise price per share of UUNET Common
Stock at which such option is exercisable immediately before the Effective Date
by the Exchange Ratio. The assumption and substitution of options as provided in
the Merger Agreement will not give the holders of such options additional
benefits or additional vesting rights (other than rights to the acceleration of
vesting or the lapse of the right of repurchase caused by the Merger under
existing contractual arrangements) which they did not have immediately prior to
the Effective Date or relieve the holders of any obligations or restrictions
applicable to their options or the shares obtainable upon exercise of the
options. After the Effective Date, the Stock Option Plans will be continued in
effect by MFS subject to amendment, modification, suspension, abandonment or
termination as provided therein, and the Stock Option Plans as so continued will
relate only to the issuance of MFS Common Stock as provided in the Merger
Agreement. No later than one day after the Effective Date of the Merger, MFS
shall file a Registration Statement on Form S-8 relating to the assumed
Outstanding Options.
Upon the earlier to occur of July 31, 1996 or the trading day immediately
preceding the Effective Date, all then outstanding rights to acquire shares of
UUNET Common Stock under UUNET's Employee Stock Purchase Plan (the "Stock
Purchase Plan") will be exercised for the purchase of shares of UUNET Common
Stock. No later than the close of the second trading day immediately preceding
the Effective Date (but not prior to the exercise mentioned in the preceding
sentence), the Board of Directors of UUNET will terminate the Stock Purchase
Plan and all outstanding options to purchase UUNET Common Stock under such plan.
All funds contributed to such Stock Purchase Plan that were not used to purchase
shares of UUNET Common Stock will be returned, in cash, to participants of the
Stock Purchase Plan as soon as administratively feasible after such termination
date, in accordance with the terms of the Stock Purchase Plan.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of UUNET and MFS to consummate the Merger are subject to
the satisfaction of certain conditions, including: (i) the approval and adoption
of the Merger Agreement and the transactions contemplated thereby by a majority
of the outstanding shares of UUNET Common Stock; (ii) the MFS Share Proposal
shall have been approved by the requisite vote of the holders of MFS Capital
Stock; (iii) the authorization for listing on Nasdaq upon official notice of
issuance of the MFS Common Stock issuable to UUNET stockholders pursuant to the
Merger Agreement; (iv) the waiting period applicable to the consummation of the
Merger under the HSR Act has expired or been terminated (which occurred on
________, 1996); (v) the Registration Statement for the MFS Common Stock to be
issued in connection with the Merger becoming effective in accordance with the
provisions of the Securities Act and not being the subject of any stop order
suspending effectiveness issued by the Commission; and (vi) the absence of any
preliminary or permanent injunction or other order by any federal or state court
in the United States which prevents the consummation of the Merger (each party
agreeing to use its best efforts to have any such injunction lifted).
The obligation of UUNET to consummate the Merger is also subject to the
satisfaction of the following further conditions (unless waived by UUNET): (i)
MFS and Sub having performed in all material respects all of their agreements
contained in the Merger Agreement required to be performed on or prior to the
Effective Date, and the representations and warranties of MFS and Sub contained
in the Merger Agreement are true in all material
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respects, when made and on and as of the Effective Date, except to the extent
they relate to a specific date; (ii) UUNET having received the opinion of Heller
Ehrman White & McAuliffe, counsel to UUNET, to the effect that as of the
Effective Date, the Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code; (iii) receipt
of certain specified third party consents; and (iv) MFS having taken all action
necessary to cause John W. Sidgmore, Richard L. Adams, Jr. and an individual
designated by UUNET and acceptable to MFS to become members of the Board of
Directors of MFS subject to consummation of the Merger.
The obligations of MFS and Sub to consummate the Merger are also subject to
the satisfaction of the following further conditions (unless waived by MFS): (i)
UUNET shall have performed in all material respects all of its obligations
contained in the Merger Agreement required to be performed by it on or prior to
the Effective Date, and the representations and warranties of UUNET contained in
the Merger Agreement are true in all material respects, when made and on and as
of the Effective Date, except to the extent they relate to a specific date; (ii)
MFS having received an opinion of Skadden, Arps, Slate, Meagher & Flom, tax
counsel to MFS, to the effect that the Merger will be treated for federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the
Code and that UUNET, MFS and Sub will each be a party to that reorganization
within the meaning of Section 368(b) of the Code; (iii) receipt of certain
specified third party consents; and (iv) MFS having received the Affiliate
Letters as defined in the Merger Agreement.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
MFS, Sub and UUNET relating to, among other things, the following matters (which
representations and warranties are subject, in certain cases, to specified
exceptions): (i) the due organization, power and standing of, and similar
corporate matters with respect to, each of UUNET, MFS and Sub; (ii) each of
UUNET's and MFS' capitalization; (iii) the authorization, execution, delivery,
performance and enforceability of the Merger Agreement by each such party and of
the transactions contemplated thereby; (iv) the absence of any conflict with
each of UUNET, MFS' and Sub's Certificate of Incorporation, By-Laws and material
agreements and instruments and compliance with applicable laws; (v) reports and
other documents filed with the Commission and other regulatory authorities and
the accuracy of the information contained therein; (vi) the absence of certain
changes or events having a material adverse effect on the financial condition,
business or results of operations of UUNET and MFS; (vii) the absence of any
default under UUNET's and MFS' employee benefit plans and compliance with ERISA;
and (viii) compliance with applicable laws.
CONDUCT OF BUSINESS PENDING THE MERGER
Prior to the Effective Date, unless MFS otherwise agrees in writing, UUNET
will, and will cause its subsidiaries to, carry on their respective businesses
in the usual, regular and ordinary course in substantially the same manner as
previously conducted, and will, and will cause its subsidiaries to, use all
reasonable efforts to preserve intact their present business organizations, keep
available the services of their present officers and employees and preserve
their relationships with customers, suppliers and others having business
dealings with them to the end that their goodwill and on-going businesses will
be unimpaired at the Effective Date, except for any impairment which would not
have a material adverse effect. UUNET will, and will cause its subsidiaries to:
(i) maintain insurance coverages and its books, accounts and records in the
usual manner consistent with prior practices; (ii) comply in all material
respects with all laws, ordinances and regulations of governmental entities
applicable to UUNET and its subsidiaries; (iii) maintain and keep its properties
and equipment in good repair, working order and condition, ordinary wear and
tear excepted; and (iv) perform in all material respects its obligations under
all contracts and commitments to which it is a party or by which it is bound, in
each case other than where the failure to so maintain, comply or perform, either
individually or in the aggregate, would have a material adverse effect on UUNET.
Except as required or permitted by the Merger Agreement, UUNET will not and
will not propose to: (i) sell or pledge or agree to sell or pledge any capital
stock owned by it in any of its subsidiaries; (ii) amend its Certificate of
Incorporation or By-laws; (iii) split, combine or reclassify its outstanding
capital stock, or declare, set aside or pay any dividend or other distribution
payable in cash, stock or property; or (iv) directly or indirectly
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redeem, purchase or otherwise acquire or agree to redeem, purchase or otherwise
acquire any shares of UUNET capital stock except for the repurchase, at cost of
shares of UUNET Common Stock upon termination of certain employees',
consultants' or directors' relationship with UUNET pursuant to existing
contractual rights of repurchase in favor of UUNET.
UUNET will not, nor will it permit any of its subsidiaries to: (i) except
as required by the Merger Agreement, issue, deliver or sell or agree to issue,
deliver or sell any additional shares of, or rights of any kind to acquire any
shares of, its capital stock of any class, any option, rights or warrants to
acquire, or securities convertible into, shares of capital stock other than
issuances of options to purchase UUNET Common Stock under the Stock Option Plans
on or after the date of the Merger Agreement to employees of UUNET or its
subsidiaries in the ordinary course of business and consistent with past
practice, other than to such employees who are executive officers of UUNET
("Permitted Options"), or issuances of UUNET Common Stock pursuant to certain
transactions proposed by UUNET, the Stock Purchase Plan or the exercise of
options outstanding on the date of the Merger Agreement or Permitted Options;
(ii) acquire, lease or dispose or agree to acquire, lease or dispose of any
capital assets or any other assets other than in the ordinary course of business
or in connection with any additional deployment or expansion of network
infrastructure requested by Microsoft; (iii) incur additional indebtedness or
encumber or grant a security interest in any asset or enter into any other
material transaction other than in each case (a) in the ordinary course of
business, (b) pursuant to any extension of credit by Microsoft, or (c) pursuant
to credit facilities not to exceed an aggregate of $40 million; (iv) acquire or
agree to acquire by merging or consolidating with, or by purchasing a
substantial equity interest in, or by any other manner, any business or any
corporation, partnership, association or other business organization or division
thereof, in each case in this clause (iv) which are material, individually or in
the aggregate, to UUNET and its subsidiaries taken as a whole, except that UUNET
may acquire or create new wholly owned subsidiaries in the ordinary course of
business and as contemplated in certain proposed transactions; (v) authorize any
capital expenditures in excess of UUNET's 1996 capital expenditure budget
(provided to MFS prior to April 29, 1996), except for capital expenditures
funded by an increase in credit facilities with Microsoft; or (vi) enter into
any contract, agreement, commitment or arrangement with respect to any of the
foregoing.
Except as disclosed to MFS, UUNET will not, nor will it permit, any of its
subsidiaries to, except as required to comply with applicable law and except as
otherwise permitted by the Merger Agreement: (i) adopt, enter into, terminate or
amend any bonus, profit sharing, compensation, severance, termination, stock
option, pension, retirement, deferred compensation, employment or other MFS
benefit plan, agreement, trust, fund or other arrangement for the benefit or
welfare of any director, officer or current or former employee other than in the
ordinary course of business consistent with past practice; (ii) increase in any
manner the compensation or fringe benefit of any director, officer or employee
(except for normal increases in the ordinary course of business that are
consistent with past practice and that, in the aggregate, do not result in a
material increase in benefits or compensation expense to UUNET and its
subsidiaries relative to the level in effect prior to such amendment and except
for increases pursuant to UUNET's pending 1996 salary increases, in an aggregate
amount not to exceed 15% of the base salary of current employees); (iii) pay any
benefit not provided under any existing plan or arrangement; (iv) grant any
awards under any bonus, incentive, performance or other compensation plan or
arrangement or UUNET benefit plan (including, without limitation, the grant of
stock options, stock appreciation rights, stock based or stock related awards,
performance units or restricted stock, or the removal of existing restrictions
in any benefit plans or agreements or awards made thereunder), other than such
plans and arrangements (other than stock options) which are made in the ordinary
course of business consistent with past practice including Permitted Options;
(v) take any action to fund or in any other way secure the payment of
compensation or benefits under any employee plan, agreement, contract or
arrangement or UUNET benefit plan other than in the ordinary course of business
consistent with past practice; or (vi) adopt, enter into, amend or terminate any
contract, agreement, commitment or arrangement to do any of the foregoing.
UUNET will not, nor will it permit any of its subsidiaries to, make any
investments in non-investment grade securities exceeding $1 million; provided,
however, that UUNET will be permitted to create new wholly owned subsidiaries in
the ordinary course of its business or pursuant to certain proposed
transactions.
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UUNET will not, nor will it permit any of its subsidiaries to, take or cause
to be taken any action (other than in the ordinary course of business consistent
with past practices), with respect to accounting policies or procedures
(including, without limitation, procedures with respect to the payment of
accounts payable and collection of accounts receivable).
Prior to the Effective Date, unless UUNET otherwise agrees in writing:
(i) MFS will, and will cause its subsidiaries to, carry on their respective
businesses in the usual, regular and ordinary course in substantially the same
manner as heretofore conducted; (ii) MFS will, and will cause its subsidiaries
to, use all reasonable efforts to preserve intact their present business
organizations, keep available the services of their present officers and
employees and preserve their relationships with customers, suppliers and others
having business dealings with them to the end that their goodwill and on-going
businesses will be unimpaired at the Effective Date; and (iii) from the date of
the Merger Agreement through the Effective Date, MFS will not pay or declare any
dividend or make any distribution with respect to MFS Common Stock except as
provided by the Merger Agreement.
COVENANTS
Each of UUNET and MFS and their respective subsidiaries will give the other
access throughout the period prior to the Effective Date to its properties,
books, contracts, commitments, records and personnel. UUNET and MFS have
further agreed to prepare and file with the Commission a registration statement
consisting of a joint proxy statement and a prospectus with respect to the MFS
Common Stock to be issued in connection with the Merger and MFS has agreed to
make all necessary filings with respect to the transactions contemplated by the
Merger under applicable state securities laws.
Prior to the Effective Date, UUNET has agreed to deliver to MFS a list
identifying all persons who were, in UUNET's reasonable judgment, at the UUNET
Record Date, "affiliates" of UUNET as that term is used in Rule 145 under the
Securities Act (the "Affiliates"). UUNET agreed to use all reasonable efforts
to obtain, and deliver to MFS, agreements from all Affiliates that they will not
sell MFS Common Stock unless such sale has been registered under the Exchange
Act, such sale is effected in compliance with Rule 145, or in the opinion of
counsel, or pursuant to a "no action" letter obtained from the staff of the
Commission, such sale is exempt from registration under the Securities Act.
MFS has agreed to use its best efforts to list the MFS Common Stock issued
pursuant to the Merger on Nasdaq.
UUNET and MFS have filed notifications under the HSR Act in connection with
the Merger and the transactions contemplated thereby, and have agreed to respond
as promptly as practicable to any inquiries received from the FTC and the
Antitrust Division for additional information and documentation and to respond
as promptly as possible to all inquiries and requests from any State Attorney
General or other governmental authority in connection with antitrust matters.
UUNET and MFS received notification of the early termination of the waiting
period under the HSR Act on ______ __, 1996.
UUNET and MFS have agreed to use all reasonable efforts to take, or cause
to be taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by the Merger Agreement, including using
all reasonable efforts to obtain all necessary waivers, consents and approvals,
to effect all necessary registrations and filings (including, but not limited
to, filings under the HSR Act and with all applicable governmental entities) and
to lift any injunction or other legal bar to the Merger (and, in such case, to
proceed with the Merger as expeditiously as possible), subject, however, in the
case of the Merger Agreement and the MFS Share Proposal, to the appropriate vote
of the stockholders of UUNET and MFS. Notwithstanding the foregoing, there will
be no action required to be taken and no action will be taken in order to
consummate and make effective the transactions contemplated by the Merger
Agreement if such action, either alone or together with another action, would
have a material adverse effect on either UUNET or MFS.
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Following the Effective Date, MFS will use its best efforts to conduct its
business, and will cause the Surviving Corporation to use its best efforts to
conduct its business, except as otherwise contemplated by the Merger Agreement,
in a manner which would not jeopardize the characterization of the Merger as a
reorganization within the meaning of Section 368(a) of the Code.
MFS agreed that from the date of the Merger Agreement until the Effective
Date, it would not participate in discussion or negotiations with, or enter into
any agreement pursuant to which MFS would acquire or agree to acquire by merging
or consolidating with, or by purchasing a substantial equity interest in, or by
any other manner, any business or any part thereof where either (i) the acquired
business is in the business of providing Internet access, (ii) the acquisition
would involve aggregate consideration in excess of $500,000,000, or (iii) the
acquisition could reasonably be expected to delay the satisfaction of the
conditions set forth in the Merger Agreement.
EFFECT ON EMPLOYEE BENEFIT PLANS
MFS agreed to honor in accordance with their terms, all employment,
severance and similar agreements to which UUNET or any subsidiary is a party and
all accrued benefits that are vested as of the Effective Date under any UUNET
benefit plan or Stock Option Plan, except as provided by the terms of such
agreement. MFS agreed to provide employees of UUNET and its subsidiaries with
credit for all service with UUNET or its affiliates for purposes of vesting and
eligibility under any employee benefit plan, program or arrangement of MFS or
its affiliates, including all employee equity incentive programs of MFS. MFS
agreed that employees of UUNET and its subsidiaries who continue to be employed
by MFS or its subsidiaries after the Effective Date may continue to participate
in their current UUNET sponsored employee benefit programs for twelve months
following the Effective Date. After the Effective Date, employees of UUNET and
its subsidiaries will be eligible to participate in the appropriate employee
equity incentive programs of MFS, as determined by MFS in its sole discretion.
NO SOLICITATION
Neither UUNET nor any of its subsidiaries will, directly or indirectly,
take (nor will UUNET authorize or permit its subsidiaries, officers, directors,
employees, representatives, investment bankers, attorneys, accountants or other
agents or affiliates, to take) any action to (i) encourage, solicit or initiate
the submission of any Acquisition Proposal (as defined below), (ii) enter into
any agreement with respect to any Acquisition Proposal or (iii) participate in
any way in discussions or negotiations with, or furnish any information to, any
person in connection with, or take any other action to facilitate any inquiries
or the making of any proposal that constitutes, or may reasonably be expected to
lead to, any Acquisition Proposal; provided, however that UUNET or its Board may
(a) furnish non-public information to, or enter into discussions with any person
or entity in connection with an unsolicited bona fide written Acquisition
Proposal by such person or entity, if prior to furnishing such non-public
information to, or entering into discussions or negotiations with such person or
entity, an executed confidentiality agreement is received from such person or
entity, (b) withdraw UUNET's Board of Directors' recommendation of the Merger,
if and only to the extent that UUNET's Board of Directors believes in good faith
(after consultation with and based upon the advice of its financial advisor)
that such Acquisition Proposal would, if consummated, result in a transaction
more favorable to UUNET's stockholders than the Merger and the UUNET Board of
Directors determines in good faith after consultation with and based upon a
written opinion of its outside legal counsel that such withdrawal is necessary
for the directors to comply with their fiduciary duties to the stockholders
under applicable Delaware law and that such withdrawal will not affect the
validity of the submission of the Merger Agreement to the stockholders of UUNET
pursuant to Delaware law or the enforceability of the Stock Option Agreement or
(c) comply with Rule 14e-2(a)(2) or (3) promulgated under the Exchange Act
with regard to an Acquisition Proposal. UUNET will promptly communicate to MFS
any solicitation by UUNET and the terms of any proposal or inquiry, including
the identity of the person and its affiliates making the same, that it may
receive in respect of any such transaction, or of any such information requested
from it or of any such negotiations or discussions being sought to be initiated
with it. "Acquisition Proposal" means any proposed (a) merger, consolidation or
similar transaction involving UUNET, (b) sale, lease or other disposition
directly or indirectly by merger, consolidation, share exchange or otherwise of
assets of UUNET or its subsidiaries representing 10% or more of the consolidated
assets of UUNET and its subsidiaries, (c) issue, sale, or other disposition of
(including by way of merger, consolidation, share exchange or any similar
transaction) securities (or options, rights or warrants
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to purchase, or securities convertible into, such securities) representing 10%
or more of the voting power of UUNET or (d) transaction in which any person will
acquire beneficial ownership (as such term is defined in Rule 13d-3 under the
Exchange Act), or the right to acquire beneficial ownership or any "group" (as
such term is defined under the Exchange Act) will have been formed which
beneficially owns or has the right to acquire beneficial ownership of 25% or
more of the outstanding UUNET Common Stock.
INDEMNIFICATION
MFS and UUNET, as the Surviving Corporation, will jointly and severally
indemnify and hold harmless directors, officers, and agents of UUNET as provided
in UUNET's Certificate of Incorporation, By-laws or indemnification agreements,
in effect on the date of the Merger Agreement with respect to matters occurring
through the Effective Date. The Merger Agreement provides that the By-laws and
the Certificate of Incorporation of Sub will be amended prior to the Effective
Date to contain indemnification provisions identical to those set forth in the
By-laws and Certificate of Incorporation of UUNET as of April 29, 1996, which
provisions will continue in full force and effect for a period of not less than
six years from the Effective Date. The Merger Agreement provides that, with
respect to matters occurring prior to the Effective Date, MFS will cause UUNET,
as the Surviving Corporation, to maintain directors' and officers' liability
insurance policies as currently maintained by UUNET for three years after the
Effective Date to the extent that such policies are obtainable at an annual cost
of not greater than three times UUNET's last annual premium prior to April 29,
1996; provided that if such coverage is not available for such amount, UUNET, as
the Surviving Corporation, will purchase as much coverage as possible for such
amount.
The Merger Agreement provides that under certain circumstances, MFS will
indemnify and hold harmless each member of UUNET's Board of Directors that has
executed, or whose affiliate or employer executed, a Stock Option Agreement
insofar as any loss, claim, damage, liability or expense arises solely out of,
or is based solely upon, a claim that such Director's fiduciary duty as a member
of UUNET's Board of Directors under Delaware law was breached by the execution
by him or his affiliate or employer, in his or its capacity as a UUNET
stockholder, of the Stock Option Agreement.
TERMINATION; FEES AND EXPENSES
The obligations of UUNET and MFS to consummate the Merger are subject to
various conditions as described above under "--Conditions to Consummation of the
Merger."
The Merger Agreement may be terminated at any time prior to the Effective
Date, whether before or after approval of the matters presented in connection
with the Merger by the stockholders of UUNET as follows: (i) by mutual consent
of the Boards of Directors of UUNET and MFS; (ii) by either MFS or UUNET if the
Merger has not been consummated on or before November 30, 1996; (iii) by UUNET
if any of the conditions to its obligations to consummate the Merger have not
been met or waived by UUNET at such time as such condition is no longer capable
of satisfaction; (iv) by MFS if any of the conditions to its obligations to
consummate the Merger have not been met or waived by MFS at such time as such
condition is no longer capable of satisfaction; (v) in the event of a Purchase
Event (as defined in this Joint Proxy Statement-Prospectus under the caption
"THE STOCK OPTION AGREEMENT - Exercise of the Option"); (vi) by either MFS or
UUNET, if the approval of UUNET's stockholders to the Merger is not obtained at
the UUNET Special Meeting; or (vii) by either MFS or UUNET if the approval of
MFS' stockholders to the MFS Share Proposal is not obtained at the MFS Annual
Meeting.
If the Merger Agreement is terminated by MFS because of a failure by the
UUNET stockholders to approve the Merger, the failure of UUNET to perform in all
material respects its agreements contained in the Merger Agreement on or prior
to the Effective Date or the failure of the representations and warranties of
UUNET contained in the Merger Agreement to be true in all material respects when
made and on and as of the Effective Date as if made on and as of such date,
except to the extent they relate to a particular date, and within 18 months
after the date of such termination, UUNET accepts or recommends to its
stockholders for approval an Acquisition Proposal that MFS believes would result
in a transaction more favorable to UUNET's stockholders than the Merger and such
Acquisition Proposal is consummated, UUNET is obligated to pay MFS a fee of $60
million. If
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the Merger Agreement is terminated by UUNET because of a failure by the MFS
stockholders to approve the MFS Share Proposal, the failure of MFS or Sub to
perform in all material respects their agreements contained in the Merger
Agreement on or prior to the Effective Date or the failure of the
representations and warranties of MFS or Sub contained in the Merger Agreement
to be true in all material respects when made and on and as of the Effective
Date as if made on and as of such date, except to the extent they relate to a
particular date, MFS is obligated to pay UUNET a fee of $60 million and, at
UUNET's option, purchase 1,551,724 shares of UUNET Common Stock for $90 million
and, at UUNET's option, provide up to $100 million of certain data
communications services to UUNET at MFS' cost over five years, with no more than
$25 million in any one year.
Generally, all costs and expenses incurred in connection with the Merger
will be paid by the party incurring such expense.
AMENDMENT; WAIVER
The Merger Agreement provides that it may be amended by the parties
thereto, by or pursuant to action taken by the respective Boards of Directors,
at any time before or after approval thereof by the stockholders of UUNET and
MFS, but, after such approval, no amendment may be made which changes the
Exchange Ratio or which in any way materially adversely affects the rights of
such stockholders, without such further approval of such stockholders. The
Merger Agreement may not be amended except by an instrument in writing signed on
behalf of each of MFS, Sub and UUNET.
At any time prior to the Effective Date, the parties to the Merger
Agreement, by or pursuant to action taken by their respective Boards of
Directors, may: (i) extend the time for the performance of any of the
obligations or other acts of the other parties thereto; (ii) waive any
inaccuracies in the representations and warranties contained therein or in any
documents delivered pursuant thereto; and (iii) waive any compliance with any of
the agreements or conditions contained therein. Any agreement on the part of a
party to the Merger Agreement to any such extension or waiver will be valid if
set forth in an instrument in writing signed on behalf of such party.
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THE STOCK OPTION AGREEMENT
The following description of the Stock Option Agreement is necessarily a
summary thereof and is therefore qualified in its entirety by reference to the
Stock Option Agreement, a copy of which is attached to this Joint Proxy
Statement-Prospectus as Annex B and incorporated herein by reference.
NUMBER OF SHARES; EXERCISE PRICE
Pursuant to the terms of the Stock Option Agreement, certain stockholders
of UUNET have granted to MFS an irrevocable option (the "Option") to acquire all
of such stockholders' shares of UUNET Common Stock (the "Shares") held on the
date of Option exercise (_________ shares as of the UUNET Record Date) for the
Exchange Ratio and cash in lieu of fractional shares. Each share of new MFS
Common Stock issued in connection with the Option exercise will be accompanied
by one MFS Right. The Option may only be exercised following the occurrence of
a Purchase Event (as defined below), and may be exercised only once. The shares
of UUNET Common Stock subject to the Stock Option Agreement are held by the
following stockholders (each a "UUNET Stockholder and collectively the "UUNET
Stockholders"): Richard L. Adams, Jr., John W. Sidgmore, Les B. Strauss, Daniel
C. Lynch, Microsoft Corporation, Menlo Ventures IV, L.P., Menlo Evergreen V,
L.P., New Enterprise Associates V, Limited Partnership, Accel IV L.P and Accel
Investors '93 L.P.
EXERCISE OF THE OPTION
The Option is exercisable, in whole but not in part, only upon the
occurrence of one of the following events (each a "Purchase Event"):
(i) any person (other than MFS or any subsidiary of MFS, having commenced (as
such term is defined in Rule 14d-2 under the Exchange Act), a tender offer
or exchange offer to purchase any shares of UUNET Common Stock such that,
upon consummation of such offer, such person would own or control 50% or
more of the then outstanding UUNET Common Stock, and the Board of Directors
of UUNET, within ten business days after such tender or exchange offer
shall have been so commenced, fails to recommend against acceptance of such
tender or exchange offer by its stockholders, and MFS delivers a written
notice of termination to UUNET within (20) business days after the
expiration of such 10 day period;
(ii) UUNET or any subsidiary of UUNET having authorized, recommended, proposed
or publicly announced an intention to authorize, recommend or propose, or
entered into, an agreement with any person (other than MFS or any
subsidiary of MFS) to (i) effect a merger, consolidation or similar
transaction involving UUNET or any of its material subsidiaries, (ii) sell,
lease or otherwise dispose of assets of UUNET or its subsidiaries
representing 10% or more of the consolidated assets of UUNET and its
subsidiaries (other than in the ordinary course of business) or (iii)
issue, sell or otherwise dispose of (including by way of merger,
consolidation, share exchange or any similar consolidation, share exchange
or any similar transaction) securities (or options, rights or warrants to
purchase, or securities convertible into, such securities) representing 10%
or more of the voting power of UUNET or any of its subsidiaries; or
(iii)any person (other than MFS, any subsidiary of MFS, UUNET or any of its
subsidiaries in a fiduciary capacity) has acquired beneficial ownership (as
such term is defined in Rule 13d-3 under the Exchange Act) or the right to
acquire beneficial ownership of, or any "group" (as such term is defined
under the Exchange Act) shall have been formed which beneficially owns or
has the right to acquire beneficial ownership of, 25% or more of the then
outstanding UUNET Common Stock.
The Option shall terminate and be of no further force and effect upon the
earliest to occur of (i) the Effective Date, (ii) 20 business days after the
termination of the Merger Agreement other than by reason of an event described
in clause (iii) or (iv) below, (iii) exercise of UUNET's right to terminate the
Merger Agreement because of a breach by MFS or Sub of any covenant or agreement
set forth in the Merger Agreement or the failure of any representation or
warranty of MFS or Sub under the Merger Agreement or of MFS under the Stock
Option
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Agreement to have been true in all material respects when made or the failure of
the stockholders of MFS to approve the Merger at the MFS Annual Meeting, (iv)
termination of the Merger Agreement pursuant to mutual consent of MFS and UUNET
or the failure to consummate the Merger by November 30, 1996, or (v) the failure
of the closing of the purchase and sale pursuant to the Option to occur within
30 business days of the date each Stockholder is sent written notice of the
exercise of the Option unless (A) the reason for such failure relates to the
inability to satisfy the conditions to register the shares of MFS Common Stock
pursuant to the Securities Act or for the notification period under the HSR Act
to have expired, in either case, for reasons outside the control of MFS, and (B)
MFS is diligently pursuing the registration of such shares with the Commission
or promptly providing all necessary information to the FTC and the Antitrust
Division as the case may be. Notwithstanding the termination of the Option, MFS
will be entitled to purchase the Shares in accordance with the terms hereof if
it has exercised the Option prior to the termination date, unless clause (iii)
or (v) above has been triggered in which case the rights to exercise this Option
will immediately cease.
The consummation of a purchase or a repurchase pursuant to the Stock Option
Agreement is subject to, among other things, the registration of the shares of
MFS Common Stock to be issued upon Option exercise and obtaining any required
regulatory approvals. In the event that prior notification to or approval of
any regulatory authority is required in connection with such purchase, MFS and,
if applicable, a Stockholder will promptly file the required notice or
application for approval and will expeditiously process the same (and such
Stockholder will cooperate with MFS in the filing of any such notice or
application and the obtaining of any such approval), and the period of time that
otherwise would run shall run instead from the date on which, as the case may
be, (i) any required notification period has expired or been terminated or (ii)
such approval has been obtained, and in either event, any requisite waiting
period has passed. MFS included the issuance of shares of MFS Common Stock
under the Stock Option Agreement in the notifications under the HSR Act filed
with respect to the Merger.
ADJUSTMENT OF NUMBER OF SHARES SUBJECT TO OPTION
If on or after the date of the Stock Option Agreement there occurs any stock
dividend, stock split, recapitalization, combination or exchange of shares,
merger, consolidation, reorganization or other change or transaction of or by
UUNET, as a result of which shares of any class of stock, other securities, cash
or other property will be issued in respect of any Shares or if any Shares shall
be changed in the same or another class of stock or other securities, then, upon
exercise of the Option, MFS will receive for the aggregate price payable upon
exercise of the Option, all such shares of stock, other securities, cash or
other property issued, delivered or received with respect to such Shares.
AGREEMENT TO VOTE
Each UUNET Stockholder agreed that from April 29, 1996, to the earlier to
occur of the termination of the Merger Agreement or the Effective Date, at any
meeting of the stockholders of UUNET, however called, and in any action by
consent of the stockholders of UUNET, such UUNET Stockholder will vote the
Shares (______ shares of UUNET Common Stock, representing approximately ___% of
the outstanding UUNET Common Stock at the UUNET Record Date) (a) in favor of the
Merger, the Merger Agreement (as amended from time to time) and the transactions
contemplated by the Merger Agreement and (b) against any proposal for any
recapitalization, merger (other than the Merger), sale of assets or other
business combination between UUNET and any person or entity (other than MFS or
Sub) or any other action or agreement that would result in a breach of any
covenant, representation or warranty or any other obligation or agreement of
UUNET under the Merger Agreement or which would result in any of the conditions
to the Merger Agreement not being fulfilled.
GRANT OF PROXY
Each UUNET Stockholder granted an irrevocable proxy in favor of MFS and Sub
to vote all of such UUNET Stockholder's Shares: (i) in favor of the Merger, the
Merger Agreement (as amended from time to time) and the transactions
contemplated by the Merger Agreement; and (ii) against any proposal for any
recapitalization, merger (other than the Merger), sale of assets or other
business combination between UUNET and any person or entity (other than MFS or
Sub) or any other action or agreement that would result in a breach of any
covenant, representation or
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warranty or any other obligation or agreement of UUNET under the Merger
Agreement or which would result in any of the conditions to the Merger Agreement
not being fulfilled. The irrevocable proxy granted by each UUNET Stockholder
terminates upon the earlier to occur of the Effective Date or the termination of
the Merger Agreement.
RESTRICTIONS ON TRANSFER
Each UUNET Stockholder agreed that, from April 29, 1996 to the termination
of the rights of MFS under the Stock Option Agreement, it will not offer or
agree to sell, transfer, tender, assign, hypothecate or otherwise dispose of, or
create or permit to exist any encumbrance on the Shares owned by such UUNET
Stockholder at any time prior to the Effective Date; provided that Mr. Adams may
sell, gift or otherwise transfer 325,000 shares of UUNET Common Stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
EACH UUNET STOCKHOLDER SHOULD CONSULT SUCH HOLDER'S TAX ADVISOR WITH
RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE EXERCISE OF THE OPTION TO SUCH
HOLDER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX
LAWS.
Exercise of the Option by MFS will result in a taxable capital gain to the
UUNET Stockholders measured by the difference between the fair market value of
the MFS stock delivered as the exercise price to a particular UUNET Stockholder
at the time of exercise and such UUNET Stockholder's basis in its shares of
UUNET Common Stock, unless such Option exercise is treated as part of a larger
transaction qualifying as a reorganization within the meaning of Section
368(a) of the Code.
MFS VOTING AGREEMENT
The following description of the MFS Voting Agreement is necessarily a
summary thereof and is therefore qualified in its entirety by reference to the
MFS Voting Agreement, a copy of which is attached as Annex C to this Joint Proxy
Statement-Prospect and incorporated herein by reference.
VOTING AGREEMENT
Pursuant to the MFS Voting Agreement, dated as of April 29, 1996, certain
stockholders of MFS have agreed that during the time the MFS Voting Agreement is
in effect, at any meeting of the MFS stockholders, however called, and in any
action by written consent of the MFS stockholders, such stockholders will vote
in favor of the MFS Share Proposal and have granted irrevocable proxies in favor
of UUNET to vote all of such stockholders' shares of MFS Common Stock held as of
the MFS Record Date in favor of the MFS Share Proposal.
The shares of MFS Common Stock subject to the terms the MFS Voting
Agreement and the irrevocable proxies (_____ shares of MFS Common Stock,
representing ___% of the outstanding shares of MFS Common Stock and
approximately ___% of the outstanding voting power of the MFS Capital Stock) are
held by the following MFS stockholders: James Q. Crowe, Howard Gimbel, William
L. Grewcock, Royce J. Holland, Richard R. Jaros, Robert E. Julian, Ronald W.
Roskens, Walter Scott, Jr., Kenneth E. Stinson and Michael B. Yanney.
NO DISPOSITION OR ENCUMBRANCE OF SHARES AND OPTIONS
Each stockholder agreed that, from April 29, 1996 until the termination of
the MFS Voting Agreement, he will not, and will not offer or agree to, sell,
transfer, tender, assign, hypothecate or otherwise dispose of, or create or
permit to exist any encumbrance on the shares of MFS Common Stock subject to the
terms of the MFS Voting Agreement at any time prior to the Effective Date.
TERMINATION
The MFS Voting Agreement terminates upon the earlier of the Effective Date
or November 30, 1996.
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BUSINESS OF UUNET
UUNET is a leading worldwide provider of a comprehensive range of Internet
access options, applications, and consulting services to businesses,
professionals and on-line services providers. UUNET provides both dedicated and
dial-up Internet access, and other applications and services which include Web
server hosting and integration services, client software and security products,
training, and network integration and consulting services. UUNET estimates that
its current customer base includes over 22,000 business and professional
accounts.
UUNET's objective is to be the leading supplier worldwide to businesses and
professionals of complete communications solutions using Internet-related
technologies. UUNET intends to achieve this position by continuing to focus on:
expanding operations worldwide; expanding its high performance network
infrastructure; expanding its sales, marketing and advertising efforts to reach
its targeted customers more effectively; integrating and expanding its suite of
value-added products and services; and building and leveraging relationships
with strategic partners.
UUNET's network infrastructure, following the acquisition of Unipalm,
of a 40 percent interest in EUnet Germany and of an additional 31 percent
interest in UUNET Canada, allowed local access to users in 543 POPs, including
288 outside of the United States as of April 1, 1996. UUNET plans to continue to
expand its network to allow local access to users in numerous additional cities
worldwide. UUNET's network infrastructure includes a high capacity frame relay-
based network backbone comprised primarily of 45 Mbps, DS-3 leased lines in the
U.S. and fractional DS-3 leased lines internationally. UUNET is expanding and
enhancing its network infrastructure which is designed to be scaleable to meet
increased user demand.
UUNET has a strategic relationship with Microsoft in which UUNET is
developing, operating and maintaining a large-scale, high speed, dial-up and
ISDN TCP/IP access network as part of its overall network infrastructure. This
network is the primary Internet dial-up network and infrastructure for
Microsoft, including The Microsoft Network. The Microsoft relationship provides
UUNET with the opportunity to accelerate the expansion of the capacity and
geographic coverage of its network infrastructure both domestically and
internationally.
UUNET initiated a major international expansion in 1995, which included
establishing international gateway hubs in 13 countries and building facilities
to allow local access to users in nine cities in Europe, seven cities in Canada,
two cities in Asia, and one city in Australia. In addition, UUNET acquired
Unipalm, the largest Internet access provider in the United Kingdom. In December
1995, UUNET agreed to acquire 40 percent of the equity of EUnet Germany, a
leading Internet services provider in Germany; the acquisition closed in
February 1996. UUNET increased its equity ownership of UUNET Canada
to 51 percent on April 1, 1996. This expansion plan capitalizes
on the opportunity to build network infrastructure for The Microsoft Network,
while providing significant capacity for UUNET to utilize for its other
customers.
UUNET intends to accelerate the international expansion begun in 1995 by
pursuing several avenues, including acquiring other Internet services providers
and complementary businesses and technologies in various target countries and
obtaining international telecommunications facilities, including significant
undersea and European terrestrial fiber optic cable capacity. UUNET believes
this new international network infrastructure will significantly decrease its
per unit cost of bandwidth and that revenues from customers, including
significant revenues from Microsoft, will substantially support the expense of
this enhancement and expansion of the network infrastructure. There can be no
assurance that UUNET will be able to achieve any of its stated objectives, plans
or beliefs as to the future scope or success of its operations.
UUNET is the owner of the following trademarks: UUNET(R), UUNET
TECHNOLOGIES(R) (logo mark), UUNET TECHNOLOGIES (globe design)TM, 10PLUS(R),
ALTERDIAL(R), ALTERNET(R), ALTERNET (design)TM, BUSINESS ONLINETM , Internet at
WorkTM, Internet 9 to 5TM, and LANGUARDIAN(R). Unipalm
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Group plc is the owner of the following trademarks: Unipalm, Unipalm (logo
mark), PIPEX, PIPEX International and Mail-It.
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INDUSTRY BACKGROUND
The Internet
The Internet is a global collection of computer networks cooperating to
enable commercial organizations, educational institutions, government agencies
and individuals to communicate electronically, access and share information and
conduct business. The Internet originated with the ARPAnet, a restricted network
started in 1969 by the United States Department of Defense Advanced Research
Projects Agency to provide efficient and reliable long-distance data
communications among the disparate computer systems used by government funded
researchers and organizations. Unlike other public and private
telecommunications networks that are managed by businesses, government agencies
and other entities, the Internet is a cooperative interconnection of many such
public and private networks. The networks that comprise the Internet are
connected in a variety of ways, including by the public switched telephone
network and by high speed, dedicated leased lines. Communications on the
Internet are enabled by TCP/IP, an internetworking standard that enables
communication across the Internet regardless of the hardware and software used.
Expansion of Internet Use
Recent technological advances, including increases in microprocessor speed
and the development of easy-to-use graphical user interfaces, combined with
cultural and business changes, have led to the Internet being integrated into
the activities of individuals and the operations and strategies of commercial
organizations. For example, a growing number of employees within organizations
have access to corporate networks, thereby increasing the amount of electronic
communication both within and between organizations. In addition, the rapid
growth of the installed base of home PCs equipped with communication devices
such as modems has created the ability to communicate electronically from home.
These technological, cultural and business trends have led to an increase in the
number of on-line services and Internet access providers. More recently the
development of World Wide Web technology and associated easy-to-use software has
made the Internet easier to navigate and more accessible to a larger number of
users and for a broader range of applications. While there has been significant
media interest in use of the Internet by consumers, business and professional
organizations currently represent a more significant percentage of Internet use.
These organizations increasingly are recognizing that the Internet can enhance
communications, both among their geographically distributed locations and
employees, and with their business partners and customers. In addition,
businesses are realizing that the Internet can enable many applications which
were previously unavailable or cost-prohibitive. For example, small and medium-
sized businesses can establish and maintain a global presence, and market and
distribute their products and services electronically.
Despite growing interest in the many commercial uses of the Internet, many
businesses have been deterred from purchasing Internet access services for a
number of reasons. These include: inconsistent quality of service; a lack of
wide availability of cost-effective high speed options; a limited number of
local access points for corporate users; inability to integrate business
applications on the Internet; the need to deal with multiple and frequently
incompatible vendors; inadequate protection of the confidentiality of stored
data and information moving across the Internet; and a lack of tools to simplify
Internet access and use.
THE UUNET SOLUTION
UUNET provides a comprehensive range of Internet access options,
applications and consulting services tailored to meet the needs of businesses
and professionals. UUNET's solution has been designed to address many of the
issues that have discouraged businesses and professionals from using the
Internet in the past. The UUNET solution is based upon UUNET's high performance,
domestic and international network infrastructure designed specifically to
provide reliable Internet connectivity to businesses with demanding throughput
requirements.
UUNET makes available to customers a variety of products and services,
including Web server hosting and content development services, client software
and security products and training, all of which can be integrated by UUNET
through its network integration and consulting services. UUNET enables Internet
users to purchase
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access, applications and services, including integration services, through a
single source. UUNET's products and services are supported by a technical staff
that is highly experienced in Internet operations and services. UUNET's network
operations center monitors traffic across UUNET's network 24 hours per day,
seven days per week.
THE UUNET STRATEGY
UUNET's objective is to be the leading supplier worldwide to businesses and
professionals of complete communications solutions using Internet-related
technologies. Certain of the statements in the section captioned "BUSINESS OF
UUNET" are based upon management's current expectations. These statements are
forward looking and actual results may differ materially. UUNET intends to
achieve its objective by focusing on five key elements:
Expand Operations Worldwide. The rate of growth of Internet use worldwide
has accelerated in the past year. In order to take advantage of the worldwide
growth of Internet use and accelerate UUNET's international expansion, UUNET
significantly expanded its operations outside the U.S. during 1995. In November
1995, UUNET acquired Unipalm, the largest Internet access provider in the United
Kingdom. In January 1996, UUNET agreed to increase its equity ownership of UUNET
Canada to 51 percent. In February 1996, UUNET completed the acquisition of 40
percent of the shares of EUnet Germany, and on April 1, 1996, UUNET acquired the
additional interest in UUNET Canada. UUNET intends to accelerate its geographic
expansion and expects to pursue various partnering arrangements to facilitate
this expansion, including joint ventures, acquisitions and commercial
arrangements. UUNET believes that these acquisitions are important steps in its
worldwide expansion strategy.
Expand High Performance Infrastructure. UUNET is continuing to expand its
high performance network infrastructure which is designed to ensure reliability,
availability and higher capacity. UUNET's network infrastructure includes 14
international gateway hubs and, following the acquisition of Unipalm, a 40
percent interest in EUnet Germany, and an additional 31 percent interest in
UUNET Canada, allowed local access to users in 543 POPs, including 288 outside
the U.S. as of April 1, 1996. UUNET plans to continue to expand its network
infrastructure to allow local access to users in numerous additional POPs
worldwide, in part, by obtaining significant undersea fiber optic cable
capacity. UUNET believes this added capacity will significantly decrease UUNET's
per unit cost of bandwidth and that revenues from customers, including
significant revenues from Microsoft, will substantially support the expense of
this enhancement and expansion of the network infrastructure.
Increase Focused Marketing Efforts. UUNET is continuing to expand its
sales, marketing and advertising efforts to reach large commercial accounts,
professionals and resellers more effectively. UUNET also intends to coordinate
its and its subsidiaries' focus on worldwide brand recognition and awareness of
their product and service offerings.
Expand and Integrate Product and Service Offerings. UUNET is continuing to
integrate and further expand its suite of value-added products and services to
provide customers with a complete communications solution using Internet
technologies, including enhanced security products and consulting services,
additional access and software options, and a broader range of Web server
hosting and content development services.
Build and Leverage Relationships with Strategic Partners. UUNET is
continuing to build and leverage strategic relationships with providers of on-
line services, Internet applications, and other products and services in
targeted industries. UUNET expects these relationships to help increase its
geographic coverage and network capacity, expand its product and service
offerings, and more effectively reach its targeted markets.
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INTERNATIONAL EXPANSION PLAN
UUNET initiated a major international expansion in 1995. UUNET has
established international gateway hubs in 14 countries (Australia, Belgium,
Canada, France, Germany, Hong Kong, Italy, Japan, The Netherlands, Singapore,
Spain, Sweden, Switzerland, the United Kingdom), which provide service in seven
cities in Canada (Calgary, Edmonton, Montreal, Ottawa, Toronto, Vancouver,
Winnipeg); nine cities in Europe (Amsterdam, Brussels, Cologne, London, Madrid,
Milan, Paris, Stockholm, Zurich); three cities in Asia (Hong Kong, Singapore,
Tokyo); and in Sydney, Australia. These hubs concentrate and route data traffic
from UUNET's dedicated and dial-up customers as well as from the dial-up
customers of The Microsoft Network. Microsoft has agreed to pay an operating fee
and a management fee in connection with these hubs. See "Microsoft
Relationship." See Note 8 of the Notes to UUNET Consolidated Financial
Statements for results of operations and identifiable assets attributable to the
geographic regions in which UUNET engages in business.
UUNET intends to accelerate the international expansion begun in 1995 by
pursuing several avenues, including acquiring other Internet services providers
and complementary businesses and technologies in various target countries and
obtaining international telecommunications facilities, including significant
undersea fiber optic cable capacity. See "Network Infrastructure."
Unipalm
In November 1995, UUNET acquired Unipalm for an aggregate of 3,338,009
shares of UUNET Common Stock. Unipalm is the largest Internet access provider in
the United Kingdom. Unipalm conducts business principally in the United Kingdom
and has investments and other relationships with Internet services providers
operating in selected countries in Europe and Africa. Unipalm offers both
dedicated and dial-up Internet access and a range of networking software based
on the TCP/IP protocols.
Unipalm's PIPEX network is an international data network service which
allows its subscribers to connect to the Internet and each other. The PIPEX
network infrastructure currently allows local access from 86 points of presence
in the United Kingdom and, through its associated entities, in 21 other
countries including Belgium, the Czech Republic, France, Germany, Hungary,
Portugal, South Africa and Spain. Unipalm's backbone network infrastructure
currently consists primarily of Cisco 7000 routers interconnected with 2 Mbps
lines and an aggregate of 6 Mbps of trans-Atlantic bandwidth. Unipalm connects
to more than 19 other service providers throughout the world. As of March 31,
1996, Unipalm estimates it had approximately 8,100 business and professional
accounts.
As part of providing comprehensive Internet solutions, Unipalm resells
Internet-related software to its customers including software developed by FTP
Software, Inc., Sun Technology Enterprises, Inc., Netscape Communications
Corporation and others, as well as Mail-It, Unipalm's own electronic mail
package for Microsoft Windows users.
As of March 31, 1996, Unipalm had 271 employees, including 133 in sales and
marketing, 106 in network operations and technical support and 32 in general and
administrative functions.
Unipalm's network operations center in Cambridge, England offers technical
support 24 hours per day seven days per week, which after normal business hours,
is provided on an on-call basis.
Unipalm's principal offices are located in Cambridge, England, where it
currently leases approximately 25,500 square feet under a sublease that
terminates in December 1996. In January 1996, Unipalm entered into a lease for
45,000 square feet in a new building in Cambridge and has begun to consolidate
its operations and move into this facility.
EUnet Germany
In December 1995, UUNET agreed to acquire a 40 percent equity ownership
interest in EUnet Germany, a leading Internet service provider in Germany; the
transaction closed in February 1996. UUNET paid $1.6 million
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in cash for its interest in EUnet Germany. EUnet Germany provides a
comprehensive range of Internet access options, applications and consulting
services to businesses, professionals, and, since March 1995, to consumers.
EUnet Germany's revenues are primarily derived from recurring monthly
connectivity fees, installation and startup charges, and sales of related
equipment, applications and services. EUnet Germany has made significant
investments in developing and expanding its network infrastructure which, prior
to January 1995, were primarily funded by cash flow from operations.
After receiving an equity investment in January 1995, EUnet Germany
accelerated the expansion of its network infrastructure and internal operations.
EUnet Germany hired additional network engineers and senior managers, greatly
increased its network operations workforce, significantly enhanced its product
and services portfolio, and upgraded its network infrastructure. In anticipation
of future growth, EUnet Germany expects to continue to make significant
investments in its network infrastructure and its corporate operations
throughout 1996. EUnet Germany's unaudited results for the fiscal year ended
December 31, 1995 included a loss of approximately $3.8 million on revenues of
approximately $8.6 million; EUnet Germany expects to continue to incur operating
losses during 1996, and UUNET, through a combination of loans and capital
contributions, will fund UUNET's share of such losses.
EUnet Germany operated as of April 1, 1996, 29 POPs on a 2 Mbps leased-line
backbone network covering nearly 80 percent of Germany. Each POP consists of a
Cisco 4500 router and an Ascend MAX 4000 HP with Digital Modem Cards, and is
fully controlled by EUnet Germany. Each POP supports dial-up, ISDN and leased
line connections up to 2 Mbps. EUnet Germany also supports dial-up connections
using public X.25 service. A support hotline is available from 8:00 a.m. to 6:00
p.m. from Monday through Friday for customer calls. At other times the network
operations personnel can be paged in case of any problems. The network is
monitored on a 24 hour basis by on-call personnel.
EUnet Germany provides a comprehensive range of Internet access services,
applications and consulting services ranging from simple dial-up Internet
access, leased line Internet access, Closed-User-Group Networks to special
consulting services, including Web hosting. EUnet Germany's customers include,
among others, several technology companies, banks, municipalities, and
publishers. As of March 31, 1996, EUnet Germany had approximately 3,600
accounts.
EUnet Germany leases approximately 1,220 square meters in Dortmund. As of
March 31, 1996, EUnet Germany employed 92 people, with 9 in management, 26 in
marketing and sales, 14 in administration and 43 in network operations.
UUNET Canada
In January 1996, UUNET agreed to increase its equity ownership of UUNET
Canada from 20 percent to 51 percent and enter into certain cooperative
commercial arrangements with UUNET Canada. The transaction closed on April 1,
1996. UUNET issued 27,079 shares of Common Stock and paid approximately $3.6
million in cash for the additional 31 percent interest in UUNET Canada. UUNET
Canada has provided Internet services in Canada since July 1991 and has been
associated with UUNET since its formation.
UUNET Canada allows local access to users in 13 Canadian POPs, with all
sites using primarily Cisco and Ascend equipment, and offers dedicated ISDN
access and leased lines. UUNET Canada's network infrastructure currently
consists of a combination of T-1, fractional T-1 and frame relay links. As of
March 31, 1996, UUNET Canada had approximately 550 business and professional
customers. UUNET Canada incurred an operating loss of approximately $75,000 for
its fiscal year ended July 31, 1995 on revenues of approximately $1.6 million.
UUNET Canada's facilities include 10,700 square feet in Toronto, Canada occupied
pursuant to a lease expiring in 2005.
As of March 31, 1996, UUNET Canada had 31 employees, with 3 in management,
7 in marketing and sales, 4 in administration and 17 in network operations.
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NETWORK INFRASTRUCTURE
UUNET's network infrastructure is based on its own 45 Mbps, DS-3 leased
line, frame relay-based network of Cascade switches supporting Cisco 7000
routers. This network infrastructure enables customers to access the Internet
through dedicated lines or by placing a local telephone call (dial-up) through a
modem to the nearest UUNET POP. Once connected, the customer's traffic is routed
through UUNET's network infrastructure to the desired Internet location, whether
on UUNET's network or elsewhere on the Internet.
UUNET continues to upgrade its network infrastructure in response to the
increase in the number of customers purchasing UUNET's Internet access services,
particularly UUNET's high-speed T-1 and 56 Kbps access options. UUNET believes
that this network infrastructure provides the higher bandwidth, increased
throughput and reliability, capacity and a geographic coverage UUNET believes is
required by businesses and professionals using the Internet at a lower cost than
its previous infrastructure. UUNET's network infrastructure, following the
acquisition of Unipalm, a 40 percent interest in EUnet Germany, and an
additional 31 percent interest in UUNET Canada, allows local access to users in
543 POPs, including 288 outside of the U.S. as of April 1, 1996.
Dial-up customers call into the ISDN/28.8 access router via ISDN or analog
modem service provided by their local exchange carrier. The ISDN/28.8 access
router relays the data to the routing engine for further processing. Dedicated
customers are connected directly to the customer access switch, which relays the
data to the routing engine. The routing engine relays the data to the
appropriate backbone switch for delivery to the destination. The DS-3 bandwidth
manager is used to connect the DS-3 frame-relay circuits from other hubs to the
local backbone switch.
UUNET has agreements with WorldCom and MFS to provide UUNET with data
communications facilities and capacity and physical space for network equipment
domestically. UUNET has received substantial discounts in exchange for minimum
usage commitments. Since entering into these agreements, UUNET has regularly met
the minimum usage requirements and has been eligible for the discounts. Under
the agreements WorldCom has committed to provide physical space in the locations
necessary to service the cities where UUNET expects to provide local access and
has agreed to provide data communications facilities serving those cities, as
required. UUNET has agreements with GEIS and Cable and Wireless to provide UUNET
with data communications facilities and capacity and physical space for network
equipment internationally.
The routers used in UUNET's and Unipalm's network infrastructure are
supplied solely by Cisco. In addition, the switches, modems and bandwidth
managers primarily used in UUNET's network infrastructure are supplied solely by
Cascade, Ascend and OnStream, respectively. UUNET purchases these components
pursuant to purchase orders placed from time to time, does not carry significant
inventories of these components and has no guaranteed supply arrangements.
UUNET intends to obtain significant fiber optic cable capacity in order to
facilitate the enhancement and expansion of its international network backbone
infrastructure. The capacity on each route would be 45 Mbps DS-3 where available
and 34 Mbps E-3 otherwise. UUNET currently leases capacity on certain of these
cable routes and believes that obtaining additional capacity through one or more
long-term arrangements would improve high-speed network performance and would
provide the additional capacity required to meet market growth, while
significantly reducing UUNET's per unit cost of providing Internet access
internationally. UUNET believes that revenues from customers, including
significant revenues from Microsoft, will substantially support this enhancement
and expansion of its network infrastructure.
UUNET has initiated the process of obtaining this initial capacity, which
will take at least several months to complete. UUNET intends to deploy a
significant portion of the capacity during 1996 and the remainder in 1997, but
the timing may vary depending upon availability and cost of capacity and other
factors. UUNET will
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need a partner, such as the local Postal Telephone and Telegraph ("PTT")
company, in each foreign jurisdiction where a cable terminates. UUNET has
initiated negotiations with various potential partners who have indicated
interest in working with UUNET, and to date, UUNET has entered into an agreement
with one such partner. In Australia, UUNET has entered into an arrangement with
Optus Networks Pty Limited ("Optus") to obtain the desired capacity. UUNET and
Optus share the capital expenditure requirements equally, and UUNET has an
option to acquire Optus' interest after three years. There can be no assurance
that the Optus arrangement will be successful, that UUNET will obtain the
required assistance of additional parties or that UUNET will be able to acquire
the capacity as currently contemplated or that its needs or resources will not
dictate a change in the capacity desired. It is anticipated that in light of the
proposed Merger, UUNET's requirements relating to fiber optic cable capacity,
both in the United States and internationally, will be refined as a result of
the anticipated benefits from the Merger.
PRODUCTS AND SERVICES
UUNET provides its customers with a comprehensive range of Internet access
options, applications and consulting services. UUNET believes that over time its
strategic focus on business applications for the Internet will play an
increasing role in differentiating UUNET from its competitors.
Access Options
The following tables describe UUNET's primary Internet access options as of
March 31, 1996.
Dedicated Internet Access
SERVICE TYPE CURRENT LIST PRICE SUMMARY DESCRIPTION
- --------------------------- -------------------------- -----------------------
High Bandwidth $1,500-$49,000/month; Very high speed
$5,000-$6,000 startup fee service for very large
businesses or
organizations with
demanding
throughput requirements
T-1 $995-$3,000/month; High speed service for
$3,000-$5,000 startup fee large businesses or
organizations with
significant throughput
requirements
Wholesale $1,250-$49,000/month; High speed service for
$4,000-$12,000 startup fee those intending to
resell Internet access
56 Kbps $595-$695/month; Medium speed service
$495-$795 startup fee via dedicated lines
or frame-relay for
small to mid-size
business
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Dial-up Internet Access
SERVICE TYPE CURRENT LIST PRICE SUMMARY DESCRIPTION
- --------------------------- ------------------------- ------------------------
Internet 9 to 5 $70 - $395/month; High speed dial-up
$195 - $395 startup fee access, plus Performance
Technology's Instant
Internet LAN to Internet
connectivity hardware
and software
AlterDial $30/month (includes 25 Low speed access for
hours/month); occasional use
$2.00/hour for additional
usage; $25 startup fee
ISDN Workgroup $295 - $495/month; Medium speed access for
$395 - $495 startup fee very small
businesses or LAN-based
workgroups
UUCP $36/month base fee, plus UUCP protocol based
$2.60 - $16/hour service for those only
requiring electronic
mail and news access
These Internet access options are sold in the U.S. and in many foreign
countries for U.S. Internet access. They are also offered under varying names
and different prices in the United Kingdom and Germany and also will be offered
in Canada. Due to various factors, such as available telecommunications
technology, foreign government regulation, and market demand, the service
options offered outside of the U.S. by UUNET or its subsidiaries vary as to
speed, price and suitability for various purposes.
Security Products and Services
UUNET addresses the confidentiality and security concerns of its customers
by offering the following security products and services. UUNET intends to
continue to expand its portfolio of security-related products to meet its
customers needs.
LanGuardian. LanGuardian, a UUNET-developed hardware security product, is
designed to encrypt and decrypt selected data as it leaves and arrives at a site
in order to render communications unintelligible to unauthorized readers while
it is being transmitted across the Internet. A LanGuardian must be installed at
each site sending and receiving encrypted data. LanGuardian currently sells for
between $5,000 and $8,000 depending upon the model purchased.
Gauntlet. Gauntlet is resold by UUNET under license from Trusted
Information Systems, Inc. Gauntlet is a firewall software product (a system
placed between networks designed to prevent unauthorized access through the
Internet to a customer's network and proprietary data). Gauntlet typically sells
for $15,000, including hardware and installation.
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Consulting Services. UUNET performs security audits of customers'
facilities for a daily fee.
Web Services
UUNET makes various services available to customers, including the design,
development, hosting and maintenance of home pages and content on the World Wide
Web. UUNET will install and maintain home pages on a UUNET server for customers
concerned with the cost, difficulty or security of maintaining home pages on
their own network. Customers may choose from a standard hosting service, which
places customers' information on a server connected to UUNET's network at 1.5
Mbps, or a premium hosting service, which places their information on a server
connected to UUNET's backbone via a 10 Mbps link. Pricing ranges from $300-
$5,400 per month. In January 1996, UUNET introduced the Secure Web hosting
service, which supports encryption software designed to provide complete end-to-
end security for commercial and other confidential applications. UUNET also
offers enhanced Web reporting services and shared file transfer protocol ("FTP")
site hosting, allowing users to offer FTP download services from UUNET
facilities.
Other Products and Services
UUNET provides additional related products and services that are often
required by UUNET's business customers, including hardware, such as network
equipment from Cisco and Ascend and Instant Internet from Performance
Technology; digital modems and cabling; software, such as Chameleon from
NetManage and Internet in a Box from Spry (a division of CompuServe); tutorials,
such as seminars to educate current and potential customers about Internet
access options and applications available from UUNET; and various consulting
services, such as integrating various Internet access services and applications.
MICROSOFT RELATIONSHIP
In December 1994, UUNET and Microsoft entered into a strategic relationship
for the development, operation and maintenance of a large-scale high speed dial-
up and ISDN TCP/IP access network which is the primary Internet dial-up network
and infrastructure for Microsoft, including The Microsoft Network. This
relationship provides UUNET with the opportunity to accelerate the expansion of
the geographic coverage and capacity of its network infrastructure domestically
and internationally. The access network is an integral part of the dial-up and
ISDN component of UUNET's upgraded network infrastructure. As a result, the
geographic coverage of the access network is the same as that of UUNET's overall
network infrastructure.
In the U.S., UUNET has available 40 percent of the access network's dial-up
capacity between 6:00 a.m. and 6:00 p.m. on business days to sell to its other
customers, and 60 percent is available to Microsoft. At all other times (nights,
weekends and holidays), 15 percent of the access network's dial-up capacity is
available to UUNET and 85 percent is available to Microsoft. Outside of the
U.S., UUNET's share of the capacity varies on a country by country basis.
Microsoft and UUNET have agreed upon the schedule for deployment of the
network, and Microsoft is obligated to pay an operating fee equal to the cost of
constructing, maintaining and operating the U.S. and Canadian dial-up network
and the first 14 international gateway hubs and to pay a management fee
regardless of any delay by Microsoft in its use of the network. The terms of
construction, maintenance and operation (including the allocation of costs and
the payment of fees) of international gateway hubs beyond the initial 14 such
hubs are subject to future agreement between Microsoft and UUNET. UUNET expects
that the terms of any funding or revenues from Microsoft relating to additional
international hubs, if any, will be different from those of the Microsoft
Agreement. In addition, UUNET and Microsoft have an understanding that providers
of Internet access services (such as the PTTs) will begin to bear certain of the
costs of the 14 international gateway hubs. As this begins, Microsoft's share of
such costs will decrease, and UUNET will become more dependent upon such
providers and other customers for revenues to support such costs. Microsoft
continues to evolve its international strategy for The Microsoft Network, and
its final strategy may differ materially from that originally anticipated.
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Microsoft agreed to lend UUNET up to $26.0 million to finance the purchase
of equipment used in construction of the network; $3.2 million remained
available for borrowing as of March 31, 1996. Principal and interest at the
greater of 7.74 percent per annum or the applicable federal rate in effect from
time to time (5.34 percent at March 31, 1996) are payable by UUNET quarterly
over five years on each advance under the loan. Interest on the loan and
depreciation on the equipment purchased with the loan proceeds are included in
the operating fee that will be paid by Microsoft. UUNET owns the equipment and
Microsoft retains a security interest in the network equipment and in UUNET's
revenues from the network. Depending upon UUNET's success in meeting certain
operational criteria agreed upon between UUNET and Microsoft, the management fee
payable by Microsoft to UUNET varies between six percent and ten percent of the
operating costs to be funded by Microsoft (exclusive of interest on the loan)
and may be temporarily suspended in the event of a sustained operational failure
of the network. Revenues from Microsoft accounted for approximately 20, 34 and
37 percent of UUNET's consolidated revenues for the year ended December 31, 1995
and the quarters ended December 31, 1995 and March 31, 1996, respectively.
As part of the relationship, Microsoft purchased 1,664,000 shares of UUNET
Series D Preferred Stock at $2.34 per share and, for no separate consideration,
a warrant to purchase 2,500,000 shares of UUNET Series E Preferred Stock with an
exercise price of $5.00 per share which Microsoft exercised immediately prior to
the closing of UUNET's initial public offering. The preferred stock converted to
UUNET Common Stock upon the initial public offering. Microsoft owns
approximately 13 percent of outstanding UUNET Common Stock.
UUNET has established a separate division to deploy and operate the
Microsoft dial-up access network. All division employees are UUNET employees,
and the manager of the division, David R. Boast, is an officer of UUNET. The
activities of the division are coordinated and directed by a Management
Committee comprised of two UUNET representatives and two Microsoft
representatives, one of whom is the Management Committee Chairperson. Three of
the four Management Committee members must approve any actions taken and
decisions made by the Management Committee. The Management Committee has
authority over certain key matters relating to the Microsoft dial-up network,
including certain personnel decisions, conduct of any third-party litigation,
operating budgets and certain technical specifications.
The network-related agreement with Microsoft has an initial term ending in
March 2000, renewable by Microsoft for an additional five years. After September
1996, Microsoft may terminate the agreement if UUNET breaches certain material
terms of the agreement and is unable to cure, thereby causing a sustained
operational failure of the dial-up access network. In addition, Microsoft may
terminate the agreement if, prior to March 2000, certain competitors of
Microsoft acquire majority ownership of UUNET. Microsoft has a right of first
refusal to purchase majority ownership of UUNET or substantially all of UUNET's
assets on the same terms as may be proposed in any unsolicited offer made to
UUNET. Microsoft has waived these rights with respect to the Merger. In
addition, Microsoft has the right to make an offer to UUNET if UUNET intends to
seek offers from multiple parties with respect to any such transaction. The
terms of the agreement with Microsoft restrict UUNET's ability, prior to March
1997, to enter into similar agreements for the deployment of other large-scale
dial-up networks with, among others, on-line services providers intending to
deploy a domestic or international on-line service. UUNET does not believe that
the impact of those restrictions will have a material effect on UUNET's business
as UUNET plans to focus on the domestic and international deployment, operation
and expansion of the Microsoft dial-up access network and UUNET's core business
(the provision of Internet access options, applications and consulting
services).
PRIVATE LABEL NETWORKS AND OTHER RELATIONSHIPS
UUNET has entered into agreements with Digital Exchange Inc., Earthlink
Network, Inc., Global Village Communication, Inc. and The "Well" to provide
Internet access for these entities' networks. UUNET also has various
distribution, reseller and other arrangements with a number of on-line services
providers and applications developers, including Advantis, CompuServe, FTP
Software, Inc., NetManage, Netscape Communications Corporation, Premenos and
Spry. UUNET is seeking and negotiating additional arrangements with other
applications developers, providers of related services and targeted industry
groups. There can be no assurance that UUNET will be able to enter into any such
arrangements or that any such arrangements will be successful.
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CUSTOMERS
UUNET's customers are businesses and professionals in many lines of
business. UUNET estimates its customer base includes over 22,000 business and
professional accounts as of March 31, 1996, compared to over 4,000 accounts as
of March 31, 1995. In 1995, no customer accounted for more than one percent of
UUNET's total revenues, other than Microsoft. See "Microsoft Relationship." The
following is a list of certain UUNET customers in each of 12 selected industry
groups to which UUNET billed monthly service fees in excess of $1,000 for
Internet access in March 1996.
Telecommunications Newspapers
------------------ ----------
AT&T Chicago Tribune Co.
Bell Atlantic Corporation Gannett Co., Inc.
SkyTel Communications Corp. Los Angeles Times
Southwestern Bell Corporation New York Times Co.
US West, Inc. Newhouse Newspaper Metro-Suburbia, Inc.
On-line & Information Services Computer Systems & Services
------------------------------ ---------------------------
CompuServe Advantis
Dow Jones & Co., Inc. Digital Equipment Corp.
EarthLink Network, Inc. Electronic Data Systems Corporation
General Electric Information IBM
Services
Reuters Holdings PLC Intel Corp.
Financial Services Banking
------------------ -------
American Express Co. Citibank
Chubb Group Citicorp
D.E. Shaw & Co. Credit Suisse
Morgan Stanley & Co. Federal Reserve Bank of
Incorporated New York
Nomura Securities Swiss Bank Corporation
International, Inc.
Computer Software Publishing
----------------- ----------
Adobe Systems, Inc. Addison-Wesley Publishing Company
Berkeley Software Design, Inc. Encyclopedia Britannica, Inc.
Chorus Systems Inc. Conde Nast Publications Inc.
Microsoft Wiley & Sons, Inc.
Trusted Information Time, Inc.
Systems, Inc.
Manufacturing Government
------------- ----------
Angus Chemical Co. Federal Reserve Board
Cummins Engine Company, Inc. Occupational Safety and Health
Deere & Co. Administration
Lockheed Martin Corp. Pacific States Marine Fisheries Commission
LTX Corp. Social Security Administration
United Nations
Utilities
--------- Other Services
Boston Edison Co. --------------
Electric Power Research DHL Worldwide Express
Institute Federal Home Loan Mortgage
Houston Lighting & Power Co. Corporation
Pacific Power & Light Company Kaiser Permanente
Suburban Cablevision Pizza Hut Worldwide
Student Loan Marketing
Association
NETWORK OPERATIONS AND TECHNICAL SUPPORT
UUNET believes that effective network and technical support are important
criteria by which commercial users select Internet access providers and has
dedicated substantial resources to building a high quality support
infrastructure. As of March 31, 1996, UUNET had a network operations group in
Fairfax, Virginia consisting of
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168 people, including 25 providing technical support. UUNET's network operations
personnel are responsible for continuously monitoring traffic across UUNET's
network 24 hours per day, seven days per week in order to maintain the
reliability of UUNET's network infrastructure. UUNET's technical support
personnel work to find solutions for customers experiencing difficulties with
Internet applications. These personnel currently are available from 8:00 a.m. to
8:00 p.m., Eastern time, Monday through Friday. At other times, UUNET's network
operations personnel respond to technical support requests and, if needed, can
page on-call technical support personnel.
UUNET plans to establish one or more additional network operations centers
to support the expansion of its network infrastructure, including one on the
west coast of the United States, and to expand its technical support
availability to 24 hours per day, seven days per week. UUNET is hiring and
training additional staff to provide improved customer support. UUNET's rapid
growth at times has strained the resources of its technical support capability.
For example, customers calling in had been unable to obtain assistance within a
commercially reasonable timeframe. Failure to provide sufficient support could
have a material adverse effect on UUNET's business, financial condition and
results of operations.
SALES AND MARKETING
As of March 31, 1996, UUNET employed 141 people in the U.S. in sales and
marketing. To date, UUNET has sold its Internet access and applications products
and services primarily through its direct telephone sales force. Call activity
is generated in response to a variety of promotional programs, including
advertising in general business and specialty periodicals, participation in
industry shows, and public relations.
In January 1995, UUNET expanded its sales channels to coincide more closely
with UUNET's enhanced range of products and services and business customer
orientation by adding a Major Accounts sales group, a Web Services sales force
and a Channel Development group. Each of these groups focuses on a different
segment of customers.
The Major Accounts group focuses on selling products and services to larger
businesses with complex Internet needs. Major accounts generally require
installations at multiple sites, security and consulting services, comprehensive
responses to requests for proposals and on-site sales and support calls. UUNET
believes that major accounts generally will require greater and more specialized
attention than can be provided by a telephone sales representative due to the
variety and number of services demanded.
The Web Services sales force focuses primarily on selling Internet access
services in conjunction with UUNET's Web server hosting services and third party
Web site development services.
The Channel Development group focuses primarily on developing and
maintaining relationships with LAN integrators, vertical solution providers,
hardware and software suppliers and other Internet access providers. UUNET
maintains ongoing relationships with a number of industry associations, hardware
and software resellers and marketing partners. The Channel Development group is
also responsible for maintaining relationships with certain of UUNET's key
accounts.
UUNET has increased its marketing and advertising efforts significantly in
1996. UUNET has expanded the number and type of publications in which it will
place new advertisements and has initiated advertising on cable television.
UUNET's current sales and marketing efforts also include the enhancement and
expansion of its suite of value-added products and services to keep pace with
changing customer demand.
COMPETITION
The market for data communications services, including Internet access and
on-line services, is extremely competitive. There are no substantial barriers to
entry, and UUNET expects that competition will intensify in the future. UUNET
believes that its ability to compete successfully depends on a number of
factors, including market
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presence; the ability to execute a strategy of rapid expansion; the capacity,
reliability and security of its network infrastructure; ease of access to and
navigation of the Internet; the pricing policies of its competitors and
suppliers; the timing of the introduction of new products and services by UUNET
and its competitors; UUNET's ability to support industry standards; and industry
and general economic trends. UUNET's success in this market will depend heavily
upon its ability to provide high quality Internet connectivity and value-added
Internet services at competitive prices.
UUNET's current and potential competitors headquartered in the United
States generally may be divided into the following three groups: (1)
telecommunications companies, such as AT&T, MCI, MFS, Sprint, WorldCom, BOCs and
@Home; (2) other Internet access providers, such as BBN, NETCOM, PSI, and other
national and regional providers; and (3) on-line services providers, such as
America Online, CompuServe, Intuit Inc., Microsoft, and Prodigy. Many of these
competitors have greater market presence, engineering and marketing
capabilities, and financial, technological and personnel resources than those
available to UUNET. As a result, they may be able to develop and expand their
communications and network infrastructures more quickly, adapt more swiftly to
new or emerging technologies and changes in customer requirements, take
advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their services than can UUNET.
UUNET expects that all of the major on-line services providers will expand
their current services to compete fully in the Internet connectivity market. In
addition, UUNET believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications companies,
will enter the Internet connectivity market, resulting in even greater
competition for UUNET. Certain companies, including America Online, AT&T, BBN
and PSI, have obtained or expanded their Internet access products and services
as a result of acquisitions and strategic investments. Such acquisitions may
permit UUNET's competitors to devote greater resources to the development and
marketing of existing competitive products and services. MFS and UUNET expect
these acquisitions and strategic investments to increase, thus creating
significant new larger competitors to MFS and UUNET. In addition, the
ability of some of UUNET's competitors to bundle other services and products
with Internet connectivity services, such as the Internet service offerings
recently announced by AT&T and MCI, could place UUNET at a competitive
disadvantage.
As UUNET continues to expand its operations outside of the United States,
it will encounter competition from companies whose operating styles are
substantially different from those that it usually experiences. UUNET will be
forced to compete with and buy services from government owned or subsidized
telecommunications providers, some of which may enjoy an absolute monopoly on
telecommunications services essential to UUNET's business. There can be no
assurance that UUNET will be able to purchase such services at a reasonable
price or at all. For example, in the United Kingdom, UUNET's Unipalm subsidiary
competes directly with: (1) telecommunications companies, such as BT, Cable and
Wireless, Mercury and others; (2) other Internet access providers, such as Demon
and EUnet, (3) on-line services providers, such as CompuServe, America
Online/Bertelsmann, Microsoft and AT&T. In addition to the risks associated with
UUNET's previously described competitors, these foreign competitors may possess
a better understanding of their local markets and may have better working
relationships with local telecommunications companies. There can be no assurance
that UUNET can obtain similar levels of local knowledge and failure to obtain
that knowledge could place UUNET at a serious competitive disadvantage.
As a result of increased competition in the industry, UUNET expects to
continue to encounter significant pricing pressure, which in turn could result
in significant reductions in the average selling price of UUNET's services. For
example, certain of UUNET's competitors which are telecommunications companies,
including AT&T and MCI, provide customers with low priced or free Internet
access services in connection with the purchase of telephone or other
communications services, significantly increasing price pressures on UUNET.
UUNET has in the past reduced prices on certain of its Internet access options
and may do so in the future. There can be no assurance that UUNET will be able
to offset the effects of any such price reductions through an increase in the
number of its customers, higher revenue from enhanced services, cost reductions
or otherwise. In addition, UUNET believes that the data communications business,
and in particular Internet access and on-line services businesses, are likely to
encounter consolidation in the near future, which could result in increased
price and other competition in the industry. Increased price or other
competition could result in erosion of UUNET's market share
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and could have a material adverse effect on UUNET's business, financial
condition and results of operations. There can be no assurance that UUNET will
have the financial resources, technical expertise, marketing and support
capabilities or expansion and acquisition capabilities to continue to compete
successfully.
PROPRIETARY TECHNOLOGY
UUNET principally relies upon copyright, trade secret and contract law to
protect its proprietary technology. It may be possible for a third party to copy
or otherwise obtain and use UUNET's products or technology without
authorization, or to develop similar technology independently and there can be
no assurance that such laws are adequate to protect UUNET's proprietary
technology. In addition, UUNET's products may be licensed in foreign countries
and the laws of foreign countries treat the protection of proprietary rights
differently from, and may not protect UUNET's proprietary rights to the same
extent as do, laws in the United States.
GOVERNMENT REGULATION
UUNET is not currently subject to direct regulation by the FCC or any other
U.S. agency, other than regulation applicable to businesses generally. The FCC
recently requested comments on a petition filed by America's Carriers
Telecommunication Association which requests that the FCC regulate certain
voice transmission on the Internet as telecommunications services. Changes
in the regulatory environment relating to the telecommunications or Internet
access industry could have an adverse effect on UUNET's business. The Telecom
Act enacted federal telecommunications legislation may permit telecommunications
companies, BOCs or others to increase the scope or reduce the cost of their
Internet access services. UUNET cannot predict the effect that the Telecom Act
or any future legislation, regulation or regulatory changes may have on its
business.
The Telecom Act prohibits and imposes liability for using an interactive
computer service for transmitting certain types of information and content. In
addition, numerous states have adopted or are currently considering similar
types of legislation. The imposition upon Internet access providers or Web
hosting sites of liability for materials carried on or disseminated through
their systems could require UUNET to implement measures to reduce its exposure
to such liability, which may require the expenditure of substantial resources or
the discontinuation of certain product or service offerings. UUNET believes that
it is currently unsettled whether the Telecom Act prohibits and imposes
liability for any services provided by UUNET should the content or information
transmitted be subject to the statute.
The law relating to the liability of on-line services providers and
Internet access providers in relation to information carried, disseminated or
hosted also is being developed in the United Kingdom and other jurisdictions.
The scope of authority of various regulatory bodies in relation to on-line
services is at present uncertain. OFTEL in the United Kingdom has recently
published a consultative document setting out a number of issues for discussion,
including the roles of traditional telecommunications and broadcasting
regulators with respect to on-line services. The Securities Investment Board is
investigating the status of on-line services and the transmission of investment
information over networks controlled by access providers. Such transmissions may
make the access provider concerned liable for any infringement of securities and
other financial services legislation and regulations. Decisions regarding
regulation, enforcement, content liability and the availability of Internet
access in other countries may significantly affect the ability to offer certain
services worldwide and the development and profitability of companies offering
Internet and on-line services in the future. For example, CompuServe recently
removed certain content from its services worldwide in reaction to law
enforcement activities in Germany, and it has been reported that an Internet
access provider in Germany has been advised by prosecutors that it may have
liability for disseminating neo-Nazi writings by providing access to the
Internet where these materials are available.
UUNET's current international expansion plans are dependent upon using
U.S.-developed technology in foreign countries. Export of technology from the
United States or import into a foreign country may be prohibited or may be
subject to duties or other fees of possibly punitive scale, delays from customs
brokers or government agencies, and regulatory or similar issues. Export from
the United States of encryption technology suitable for commercial transactions
is currently severely restricted and in some countries use of such technology is
illegal.
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PROPERTY
UUNET's offices are located in Fairfax, Virginia, where as of March 31,
1996 UUNET leased approximately 68,800 square feet under a sublease that expires
in 1999 and approximately 4,500 square feet under a sublease that expires in
2001. In April 1996, UUNET leased approximately 71,300 additional square feet in
Fairfax, Virginia under a lease that expires in 2,006. UUNET also leases space
(typically less than 500 square feet) in various geographic areas to house the
telecommunications equipment for each of its POPs.
EMPLOYEES
As of March 31, 1996, UUNET employed in the United States 351 persons,
including 141 in sales and marketing, 168 in network operations (including 25 in
technical support) and 42 in general and administrative functions. None of
UUNET's employees is represented by a labor union, and UUNET considers its
employee relations to be good. See "--International Expansion Plan" for a
description of the employees of UUNET's international subsidiaries.
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SELECTED CONSOLIDATED FINANCIAL DATA OF UUNET
SELECTED FINANCIAL DATA
The selected consolidated financial data for each of the three years
in the period ended December 31, 1995, and as of December 31, 1994 and
1995, have been derived from UUNET's audited consolidated financial
statements. The selected consolidated financial data for the years ended
December 31, 1991 and 1992, and as of December 31, 1991, 1992 and 1993,
have been derived from audited financial statements of UUNET and Unipalm.
The selected consolidated financial data presented below for the three
months ended March 31, 1995 and 1996, and as of March 31, 1996, have been
derived from unaudited consolidated financial statements of UUNET. In the
opinion of UUNET's management, the unaudited financial statements have been
prepared on the same basis as the audited consolidated financial statements
and include all adjustments, which consist only of normal recurring
adjustments, necessary for a fair presentation of the financial position
and the results of operations for these periods. Operating results for the
three months ended March 31, 1996 are not necessarily indicative of the
results that may be expected for any future period. The selected
consolidated financial data set forth below should be read in conjunction
with "UUNET Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the UUNET Consolidated Financial Statements and
Notes thereto included elsewhere in this Joint Proxy Statement-Prospectus.
<TABLE>
<CAPTION>
Three Months
Ended March 31, Years Ended December 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- ------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Consolidated Statement of Operations
Data(1):
Revenues:
Internet services...................... $ 39,004 $ 8,815 $ 71,521 $16,860 $10,039 $ 7,054 $ 4,979
Software............................... 4,009 6,205 22,940 16,278 13,980 13,342 9,201
-------- ------- -------- ------- ------- ------- -------
Total revenues....................... 43,013 15,020 94,461 33,138 24,019 20,396 14,180
-------- ------- -------- ------- ------- ------- -------
Costs and expenses:
Cost of revenues
Internet services.................... 25,062 4,490 46,393 10,262 6,452 3,556 2,618
Software............................. 2,391 3,557 12,946 9,369 7,240 7,454 3,842
Network operations and support......... 5,265 2,315 13,127 6,764 3,850 1,658 1,850
Sales and marketing.................... 6,798 3,210 18,762 9,681 5,558 3,055 2,512
General and administrative............. 3,126 1,839 12,709 5,288 2,248 3,071 1,532
Acquisition expense.................... -- -- 11,067 -- -- -- --
-------- ------- -------- ------- ------- ------- -------
Total costs and expenses............. 42,642 15,411 115,004 41,364 25,348 18,794 12,354
-------- ------- -------- ------- ------- ------- -------
Income (loss) from operations........... 371 (391) (20,543)(2) (8,226) (1,329) 1,602 1,826
Interest income......................... 577 194 2,747 440 36 29 52
Interest expense........................ (329) (83) (808) (76) (103) (198) (139)
Equity in net loss of affiliates........ (386) -- (127) -- -- -- --
Loss on sale of investment in related
party.................................. -- -- -- -- (433) -- --
Other................................... -- -- -- -- -- 20 --
-------- ------- -------- ------- ------- ------- -------
Income (loss) before income taxes....... 233 (280) (18,731)(2) (7,862) (1,829) 1,453 1,739
Benefit (provision) for income taxes.... -- 17 474 (126) (197) (379) (441)
-------- ------- -------- ------- ------- ------- -------
Net income (loss)....................... $ 233 $ (263) $(18,257)(2) $(7,988) $(2,026) $ 1,074 $ 1,298
======== ======= ======== ======= ======= ======= =======
Pro forma net income (loss) per common and
equivalent share(3).................... $0.01 $(0.01) $(0.63)(2) $(0.35)
Shares used in computing pro forma net
income (loss) per share amounts(3)..... 33,436 25,774 28,987 22,946
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
--------- -------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data(1):
Cash and cash equivalents............... $ 45,413 $ 60,424 $10,493 $ 857 $ 280 $ 776
Working capital......................... 17,789 38,335 4,270 (1,499) (584) (874)
Total assets............................ 156,278 137,610 29,625 10,585 8,285 6,499
Notes payable, net of current portion... 18,045 13,686 1,196 634 774 696
Redeemable convertible preferred stock.. -- -- 14,073 2,676 200 --
Total stockholders' equity(4)........... 82,084 80,667 279 425 2,567 1,191
</TABLE>
<TABLE>
<CAPTION>
Three Months
Ended March 31, Years Ended December 31,
------------------------ ----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- ------- -------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Financial Data:
EBITDA(5)............................... $ 4,319 $ 634 $ (1,154) $(6,075) $ (120) $ 2,509 $ 2,376
</TABLE>
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___________________
(1) UUNET acquired Unipalm in November 1995 in a transaction that was accounted
for as a pooling of interests and, as such, all financial amounts contained
in this table and the UUNET Consolidated Financial Statements have been
restated to include the financial results and data of Unipalm for all
periods presented. Unipalm previously had an April 30 fiscal year-end. In
order to conform Unipalm's fiscal year-end to UUNET's calendar year-end, the
statement of operations data for the years ended December 31, 1991, 1992 and
1993 reflect the statement of operations of Unipalm for the fiscal years
ended April 30, 1992, 1993 and 1994, respectively. The consolidated
statement of operations data for the year ended December 31, 1993 includes
the four month period ended April 30, 1994 which is also included in the
consolidated statement of operations data for the year ended December 31,
1994. The consolidated balance sheet data as of December 31, 1991, 1992 and
1993, includes the balance sheet data of Unipalm as of April 30, 1992, 1993
and 1994, respectively. See Note 1 of Notes to UUNET's Consolidated
Financial Statements for amounts included in more than one period.
(2) Reflects the incurrence of acquisition-related costs of approximately $11.1
million during the fourth quarter of 1995 in connection with the acquisition
of Unipalm.
(3) See Note 1 of Notes to UUNET's Consolidated Financial Statements for an
explanation of the determination of the number of shares and share
equivalents used in computing pro forma per share amounts.
(4) UUNET was an S corporation for federal and state income tax purposes through
September 1992. UUNET paid cash dividends to its stockholders in 1991 and
1992 sufficient for its stockholders to pay income taxes on UUNET's taxable
income. UUNET, on a consolidated basis, has not declared any dividends
since 1994. Dividends declared and paid by UUNET on a consolidated basis
were $33,000 ($0.01 per share) in 1991, $587,000 ($0.08 per share) in 1992,
and $129,000 ($0.01 per share) in 1994.
(5) Represents earnings (loss) before depreciation and amortization, interest
and income tax (expense) benefit. UUNET has included information concerning
EBITDA because it understands that such information is used by certain
investors as one measure of an issuer's operating performance. EBITDA is not
determined in accordance with generally accepted accounting principles
("GAAP"), is not indicative of cash used by operating activities and should
not be considered in isolation or as a substitute for measures of
performance determined in accordance with GAAP. For the year ended December
31, 1995, EBITDA excludes acquisition-related costs of approximately $11.1
million incurred in connection with the acquisition of Unipalm.
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UUNET MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
UUNET is a leading worldwide provider of a comprehensive range of Internet
access options, applications, and consulting services to businesses,
professionals and on-line services providers. UUNET provides both dedicated and
dial-up Internet access, and other applications and services which include Web
server hosting and integration services, client software and security products,
training, and network integration and consulting services. Internet services
revenues are primarily derived from recurring monthly connectivity fees,
installation and startup charges, and sales of related equipment, applications
and services. In addition, a substantial portion of Internet services revenues
are derived from the development, operation and maintenance of the high speed
dial-up network for Microsoft. Software revenues consist primarily of the sale
of Internet-related packaged third party software.
UUNET has made significant investments in developing and expanding its
network infrastructure which, prior to an equity financing in October 1993, were
primarily funded by cash flow from operations. Equity financings in 1993, 1994
and 1995 allowed UUNET to accelerate the expansion of its network infrastructure
and internal operations over the ten quarters ended March 31, 1996. During
this period, UUNET hired a significant number of senior managers, greatly
increased its sales force, significantly expanded its product and services
portfolio, and substantially upgraded its network infrastructure. The
substantial costs incurred in connection with these activities contributed to
UUNET's operating losses in 1993, 1994 and 1995.
UUNET's consolidated operating results have fluctuated significantly in the
past and are expected to fluctuate significantly in the future as a result of a
variety of factors, some of which are beyond UUNET's control. As of March 31,
1996, UUNET had an accumulated deficit of approximately $27.3 million. UUNET
expects to increase significantly its expenses for international network
expansion, personnel, new product development and marketing, and undersea and
European terrestrial fiber optic cable capacity, and acquisitions of capital
equipment, in coordination with MFS as a subsdiary of MFS. In addition, UUNET
has incurred substantial costs in the quarter ended December 31, 1995 in
connection with the acquisition of Unipalm.
RESULTS OF OPERATIONS
On November 15, 1995, UUNET acquired Unipalm in a stock transaction
accounted for as a pooling of interests (see Note 1 of Notes to UUNET
Consolidated Financial Statements). Unipalm is the largest Internet services
provider in Europe and the largest Internet access provider in the United
Kingdom. As a result of the Unipalm acquisition, the accompanying consolidated
financial statements and related financial data have been restated to include
the financial results and data of Unipalm for all periods presented.
-84-
<PAGE>
As an aid to understanding UUNET's consolidated operating results, the
following table sets forth certain items from the Consolidated Statements of
Operations as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
--------------- ------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Internet services.................. 91% 59% 76 % 51 % 42 %
Software........................... 9 41 24 49 58
---- ---- ---- ---- ----
Total revenues................ 100 100 100 100 100
---- ---- ---- ---- ----
Costs and expenses:
Cost of revenues................... 64 54 63 59 57
Network operations and support..... 12 16 14 21 16
Sales and marketing................ 16 21 20 29 23
General and administrative......... 7 12 13 16 10
Acquisition expense................ -- -- 12 -- --
---- ---- ---- ---- ----
Total costs and expenses...... 99 103 122 125 106
---- ---- ---- ---- ----
Income (loss) from operations........... 1 (3) (22) (25) (6)
Interest income......................... 1 1 3 1 --
Interest expense........................ -- -- (1) -- --
Loss on sale of investment in
related party.......................... -- -- -- -- (2)
Equity in net loss of affiliates........ (1) -- -- -- --
---- ---- ---- ---- ----
Income (loss) before income taxes....... 1 (2) (20) (24) (8)
Benefit for income taxes................ -- -- 1 -- --
---- ---- ---- ---- ----
Net income (loss)....................... 1% (2)% (19)% (24)% (8)%
==== ==== ==== ==== ====
</TABLE>
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<PAGE>
FISCAL YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Revenues
UUNET derives substantially all of its revenues from two main activities:
Internet services and the sale of Internet-related third party software.
Internet services revenues result from providing a comprehensive range of
Internet access options, applications and services to businesses, professionals
and on-line services providers. A substantial portion of Internet services
revenues are derived from the development, operation and maintenance of the high
speed dial-up network for Microsoft. Total revenues grew 38% from $24.0 million
in 1993 to $33.1 million in 1994, and 185% to $94.5 million in 1995. The major
components of this increase are discussed below.
Internet services revenues grew 68% from $10.0 million in 1993 to $16.9
million in 1994, and 324% to $71.5 million in 1995, and represented 42%, 51% and
76%, respectively, of total revenues. This growth was primarily a result of
increases in the number of dedicated high speed connections sold by UUNET during
those periods as well as upgrades to higher speed connections, and in 1995, the
build-out of the dial-up network for Microsoft. The number of high speed
connections sold by UUNET increased from 216 in 1993 to 734 in 1994, and to
2,292 in 1995. UUNET (excluding Unipalm) sold 133, 547 and 1,789 of these
connections in 1993, 1994 and 1995, respectively. Upgrades to higher speed
connections sold by UUNET increased from nine in 1993 to 53 in 1994, and to 369
in 1995. UUNET (excluding Unipalm) sold 44 and 345 upgrades in 1994 and 1995,
respectively. Revenues from dial-up connections also increased from 1993 through
1995, but at a much lower rate, and were partially offset by the anticipated
decrease in revenues from UUNET's older UUCP news and mail service. The dollar
increase in high speed and dial-up revenues resulted primarily from an increase
in marketing efforts and the number of sales and marketing personnel, as well as
the rapid increase in the use of the Internet in general. Revenues from
Microsoft totaled approximately $19.3 million in 1995, contributing
significantly to the $54.7 million increase in Internet services revenues from
1994 to 1995, and represented 20.4% of total revenues during 1995; there were no
revenues from Microsoft in 1993 or 1994.
Software revenues, generated by Unipalm, grew 16% from $14.0 million in
1993 to $16.3 million in 1994, and 41% to $22.9 million in 1995, and represented
58%, 49% and 24%, respectively, of total revenues. The growth of software
revenues was due primarily to the increased demand for TCP/IP and Network File
System (NFS) products in general, and to the significant increase in the number
of sales and marketing personnel in particular, especially from 1994 to 1995.
The effect of price reductions due to competitive factors has not had a
material impact on revenue growth or profit margins during fiscal years 1993,
1994 and 1995.
Cost of Revenues
Total cost of revenues increased 43% from $13.7 million in 1993 to $19.6
million in 1994, and 202% to $59.3 million in 1995, representing 57%, 59% and
63%, respectively, of total revenues. The major components of this increase are
discussed below.
Cost of Internet services revenues consists primarily of leased network
backbone circuit costs, local access costs and, to a lesser extent, depreciation
of network-related equipment and the cost of equipment and applications sold to
customers. Cost of Internet services revenues increased 59% from $6.5 million in
1993 to $10.3 million in 1994, and 352% to $46.4 million in 1995, and as a
percentage of Internet services revenues were 64%, 61% and 65% in 1993, 1994 and
1995, respectively. The cost of Internet services revenues as a percentage of
Internet services revenues decreased between 1993 and 1994, primarily due to
increased network utilization during 1994, partially offset by a $400,000
inventory write-off during 1994. The increase in such percentages from 1994 to
1995 was due primarily to the lower margin revenues associated with the build-
out of the dial-up network for Microsoft and, to a lesser extent, the upgrade
and expansion in the second half of 1995 of UUNET's network infrastructure and
Unipalm's network for its dial-up product.
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<PAGE>
Cost of software revenues increased 29% from $7.2 million in 1993 to $9.4
million in 1994, and 38% to $12.9 million in 1995, and as a percentage of
software revenues were 52%, 58% and 56% in 1993, 1994 and 1995, respectively.
The cost of software revenues as a percentage of software revenues has
fluctuated from 1993 through 1995, primarily due to changes in the mix of
software products sold and to fluctuations in the U.S. dollar to pound sterling
exchange rate.
Network Operations and Support
Network operations and support costs consist primarily of the expenses of
operating the network infrastructure, including monitoring network traffic and
quality, and costs of providing technical support to customers. Network
operations and support costs rose 76% from $3.9 million in 1993 to $6.8 million
in 1994, and 94% to $13.1 million in 1995. These costs increased as a percentage
of total revenues from 16% in 1993 to 21% in 1994, and decreased to 14% in 1995.
Approximately $1.3 million of the increase from 1993 to 1994, and $4.8 million
of the increase from 1994 to 1995, were due to the hiring of additional
personnel. UUNET hired additional personnel in this area primarily to support
its expanding customer base and expand its network infrastructure and, for
UUNET, to deploy the dial-up network for Microsoft. The remainder of the dollar
increase in both periods was due primarily to higher facilities-related costs.
The increase in network operations and support costs as a percentage of total
revenues from 1993 to 1994 was due primarily to increased hiring of personnel in
1994, whereas the percentage decrease from 1994 to 1995 was due primarily to
total revenues increasing more quickly than network operations and support
costs.
Sales and Marketing
Sales and marketing costs consist primarily of salaries and expenses of
sales and marketing personnel, advertising and other promotional activities,
procurement and installation of local access circuits and customer equipment,
and product development and enhancement. Sales and marketing costs rose 74% from
$5.6 million in 1993 to $9.7 million in 1994, and 94% to $18.8 million in 1995.
These costs increased as a percentage of total revenues from 23% in 1993 to 29%
in 1994, and decreased to 20% in 1995. Approximately $2.4 million of the
increase from 1993 to 1994, and $6.1 million of the increase from 1994 to 1995,
were due to the hiring of additional personnel, with the remainder of the
increase in both years due primarily to expanded advertising and promotional
activities. The increase in sales and marketing costs as a percentage of total
revenues from 1993 to 1994 was primarily due to increased hiring of personnel in
1994, while the percentage decrease from 1994 to 1995 was due primarily to total
revenues increasing more quickly than sales and marketing costs as a result of
UUNET's expanding customer base and the revenues from Microsoft.
General and Administrative
General and administrative costs consist primarily of expenses associated
with UUNET's management, accounting, finance and administrative functions.
General and administrative costs increased 135% from $2.2 million in 1993 to
$5.3 million in 1994, and 140% to $12.7 million in 1995. These costs increased
as a percentage of revenues from 10% in 1993 to 16% in 1994, and decreased to
13% in 1995. The increase in general and administrative expenses from 1993 to
1994 was due primarily to the hiring of additional management, finance,
accounting and administrative personnel to support UUNET's expanding customer
base, and in the fourth quarter of 1994, expenses of $330,000 related to UUNET's
move into a new facility and $160,000 related to negotiating relationships with
Microsoft and other parties. The $7.4 million increase in expenses from 1994 to
1995 was due primarily to costs associated with the consolidation of facilities
in the United Kingdom, increasing reserves for possible doubtful accounts, the
write-down of certain fixed assets in the United Kingdom, and the hiring of
additional finance and administrative personnel to support UUNET's growth. The
increase in general and administrative costs as a percentage of total revenues
from 1993 to 1994 was due primarily to increased hiring of personnel, and
UUNET's move and negotiating costs in 1994 referred to above, while the
percentage decrease from 1994 to 1995 was due primarily to total revenues
increasing more quickly than general and administrative costs as a result of
UUNET's expanding customer base and the revenues from Microsoft.
-87-
<PAGE>
Acquisition Expense
On November 15, 1995, UUNET acquired Unipalm in a stock transaction
accounted for as a pooling of interests and UUNET incurred acquisition-related
costs of $11.1 million. These costs were expensed in the fourth quarter of 1995
and consisted primarily of investment banking and other professional fees, which
totaled $7.0 million. The remaining costs of $4.1 million consisted primarily of
direct costs necessary to complete the transaction, including taxes and printing
and mailing costs.
Interest Income and Expense
Neither interest income nor interest expense was material in 1993 and 1994.
In 1995, UUNET earned $2.7 million in interest income as a result of investing
excess funds from equity financings, in particular UUNET's initial public
offering in May 1995. Interest expense of $0.8 million in 1995 was due primarily
to borrowings under equipment loan arrangements and capital leases to assist in
financing UUNET's network infrastructure expansion.
Loss on Sale of Investment in Related Party
UUNET realized a loss of $433,000 in 1993 on the disposition of an
investment in a related party. See Note 7 of Notes to UUNET Consolidated
Financial Statements.
Provision for Income Taxes
UUNET records income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The
adoption of SFAS 109 by UUNET on January 1, 1993 had no effect on UUNET's
consolidated financial position or results of operations for the year ended
December 31, 1993. The effective income tax rates were 11%, 2% and (3%) during
1993, 1994 and 1995, respectively. These rates were substantially below the
statutory U.S. federal tax rate of 34%, primarily due to deferring recognition
of benefits for net operating loss carryforwards as realization of such is not
assured. As of December 31, 1995, UUNET had U.S. federal net operating loss
carryforwards of approximately $12.2 million. These carryforwards expire in the
years 2008 through 2010. The amount of these carryforwards that can be used in
any given year may be limited in the event of certain changes in the ownership
of UUNET. Management believes that neither the prior ownership changes [nor the
change in ownership of UUNET that may result from the Merger] will significantly
limit its ability to use these net operating loss carryforwards. Unipalm also
had foreign net operating loss carryforwards of approximately $2.5 million as
of December 31, 1995. See Note 10 of Notes to UUNET Consolidated Financial
Statements.
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
Revenues
Total revenues grew 186% from $15.0 million in the first quarter of 1995 to
$43.0 million in the first quarter of 1996. The major components of this net
increase are discussed below.
Internet services revenues grew 342% from $8.8 million in the first
quarter of 1995 to $39.0 million in the first quarter of 1996, and represented
59% and 91%, respectively, of total revenues. This growth was primarily a result
of increases in the number of dedicated high speed connections sold by UUNET
during those periods and upgrades by customers to higher speed connections,
increased sales of dial-up connections and the build-out of the dial-up network
for Microsoft. The number of high speed connections sold increased from 444 in
the first quarter of 1995 to 985 in the first quarter of 1996. UUNET (excluding
Unipalm) sold 330 and 805 of these connections in
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<PAGE>
the first quarter of 1995 and 1996, respectively. Upgrades to higher speed
connections increased from 37 in the first quarter of 1995 to 181 in the first
quarter of 1996. UUNET (excluding Unipalm) sold 30 and 167 upgrades in the first
quarter of 1995 and 1996, respectively. Revenues from dial-up connections
increased significantly from quarter-to-quarter. The dollar increase in high
speed and dial-up revenues resulted primarily from an increase in marketing
efforts and the number of sales and marketing personnel, as well as the rapid
increase in the use of the Internet in general. Revenues from Microsoft
increased from $0.2 million in the first quarter of 1995 to $15.9 million in the
first quarter of 1996 . The build-out of the domestic dial-up network commenced
in the first quarter of 1995 and the international deployment began in the
fourth quarter of 1995. The accelerated build-out of these networks at
Microsoft's request resulted in revenues from Microsoft increasing substantially
and representing 36.9% of total revenues during the first quarter of 1996.
Software revenues, generated by Unipalm, decreased 35% from $6.2 million in
the first quarter of 1995 to $4.0 million in the first quarter of 1996, and
represented 41% and 9%, respectively, of total revenues. The decrease in
software revenues was due primarily to increased competition in the United
Kingdom.
Except for the effect on software revenues as described above, the effect
of price reductions due to competitive factors has not had a material impact on
revenue growth or profit margins during the first quarters of 1995 and 1996.
Cost of Revenues
Total cost of revenues increased 241% from $8.0 million in the first
quarter of 1995 to $27.5 million in the first quarter of 1996, representing 54%
and 64%, respectively, of total revenues. The major components of this net
increase are discussed below.
Cost of Internet services revenues consists primarily of leased network
backbone circuit costs, local access costs and, to a lesser extent, depreciation
of network-related equipment and the cost of equipment and applications sold to
customers. Cost of Internet services revenues increased 458% from $4.5 million
in the first quarter of 1995 to $25.1 million in the first quarter of 1996, and
as a percentage of Internet services revenues were 51% and 64%, respectively.
The cost of Internet services revenues as a percentage of Internet services
revenues increased primarily due to the lower margin revenues associated with
the build-out of the dial-up network for Microsoft.
Cost of software revenues decreased 33% from $3.6 million in the first
quarter of 1995 to $2.4 million in the first quarter of 1996, and as a
percentage of software revenues were 57% and 60%, respectively. The cost of
software revenues as a percentage of software revenues has increased primarily
due to increased competition, as previously discussed.
Network Operations and Support
Network operations and support costs rose 127% from $2.3 million in the
first quarter of 1995 to $5.3 million in the first quarter of 1996. These costs
decreased as a percentage of total revenues from 16% in the first quarter of
1995 to 12% in the first quarter of 1996. Approximately $1.7 million of the
increase was due to the hiring of additional personnel. UUNET hired additional
personnel in this area primarily to support its expanding customer base and to
expand its network infrastructure, including the domestic and international
network for Microsoft. The remainder of the dollar increase was due primarily to
higher facilities and related costs. The decrease in network operations and
support costs as a percentage of total revenues was due primarily to total
revenues increasing more quickly than network operations and support costs.
-89-
<PAGE>
Sales and Marketing
Sales and marketing costs rose 112% from $3.2 million in the first quarter
of 1995 to $6.8 million in the first quarter of 1996. These costs decreased as a
percentage of total revenues from 21% in the first quarter of 1995 to 16% in the
first quarter of 1996. Approximately $1.7 million of the increase was due to
increased advertising and promotional costs directly associated with UUNET's
decision to implement a major advertising campaign beginning in the first
quarter of 1996. The remainder of the increase was primarily due to the hiring
of additional personnel. The percentage decrease was primarily due to total
revenues increasing more quickly than sales and marketing costs as a result of
UUNET's expanding customer base and the revenues from Microsoft.
General and Administrative
General and administrative costs increased 70% from $1.8 million in the
first quarter of 1995 to $3.1 million in the first quarter of 1996. These costs
decreased as a percentage of revenues from 12% in the first quarter of 1995 to
7% in the first quarter of 1996. The increase in general and administrative
expenses was due primarily to the hiring of additional personnel to support
UUNET's expanding customer base and increases in other general corporate costs.
The decrease in general and administrative costs as a percentage of total
revenues was primarily due to total revenues increasing more quickly than
general and administrative costs as a result of UUNET's expanding customer base
and the revenues from Microsoft.
Interest Income and Expense
Interest income increased from $0.2 million in the first quarter of 1995 to
$0.6 million in the first quarter of 1996, while interest expense increased in
the respective periods from $0.1 million to $0.3 million. The increase in
interest income resulted from investing excess funds from equity financings, in
particular UUNET's initial public offering in May 1995, while interest expense
increased due primarily to borrowings under the Microsoft loan facility and
capital leases to assist in financing UUNET's network infrastructure expansion.
Equity In Net Loss Of Affiliates
The equity in net loss of affiliates is due primarily to UUNET's
acquisition of a 40% interest in the outstanding capital stock of EUnet Germany
in the first quarter of 1996. EUnet Germany is a provider of Internet access
options, applications and consulting services in Germany.
QUARTERLY RESULTS
The following table sets forth quarterly consolidated financial data for
each of the nine fiscal quarters in the period ended March 31, 1996 including
such amounts expressed as a percentage of total revenues. All amounts previously
reported by UUNET have been restated to include the results of Unipalm. UUNET
acquired Unipalm on November 15, 1995 and accounted for the acquisition as a
pooling of interests. The quarterly information below is unaudited, but has been
prepared on the same basis as the audited consolidated financial statements and,
in the opinion of management, reflects all adjustments necessary to present this
information fairly when considered in
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<PAGE>
conjunction with UUNET's audited consolidated financial statements and the notes
thereto. Consolidated operating results for any quarter are not necessarily
indicative of results for any future periods.
-91-
<PAGE>
<TABLE>
<CAPTION>
1994 1995 1996
-------------------------- ------------------------------------------------ --------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues:
Internet services................... $3,074 $ 3,651 $ 4,354 $ 5,781 $ 8,815 $13,655 $20,037 $ 29,014 $39,004
Software............................ 3,963 3,298 4,501 4,516 6,205 6,350 5,592 4,793 4,009
------ ------- ------- ------- ------- ------- ------- -------- -------
Total revenues.................... 7,037 6,949 8,855 10,297 15,020 20,005 25,629 33,807 43,013
------ ------- ------- ------- ------- ------- ------- -------- -------
Costs and expenses:
Cost of revenues.................... 4,029 4,052 5,576 5,974 8,047 11,652 17,000 22,640 27,453
Network operations and
support............................ 1,237 1,587 1,866 2,074 2,315 3,384 3,634 3,794 5,265
Sales and marketing................. 1,701 2,125 2,818 3,037 3,210 4,126 5,284 6,142 6,798
General and administrative.......... 982 1,205 1,224 1,877 1,839 3,111 5,258 2,501 3,126
Acquisition expense................. -- -- -- -- -- -- -- 11,067 --
------ ------- ------- ------- ------- ------- ------- -------- -------
Total costs and expenses.......... 7,949 8,969 11,484 12,962 15,411 22,273 31,176 46,144 42,642
------ ------- ------- ------- ------- ------- ------- -------- -------
Income (loss) from operations......... (912) (2,020) (2,629) (2,665) (391) (2,268) (5,547) (12,337) (1) 371
Interest income....................... 38 108 124 170 194 433 1,193 927 577
Interest expense...................... (18) (14) (17) (27) (83) (141) (202) (382) (329)
Equity in net loss of affiliates...... -- -- -- -- -- -- -- (127) (386)
------ ------- ------- ------- ------- ------- ------- -------- -------
Income (loss) before income taxes..... (892) (1,926) (2,522) (2,522) (280) (1,976) (4,556) (11,919) (1) 233
Tax benefit (provision)............... -- (31) (47) (48) 17 122 282 53 --
------ ------- ------- ------- ------- ------- ------- -------- -------
Net income (loss)..................... $ (892) $(1,957) $(2,569) $(2,570) $ (263) $(1,854) $(4,274) $(11,866) (1) $ 233
====== ======= ======= ======= ======= ======= ======= ======== =======
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
1994 1995 1996
------------------------------------ -------------------------------------- --------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of Revenues:
Revenues:
Internet services.................... 44% 53% 49% 56% 59% 68% 78% 86% 91%
Software............................. 56 47 51 44 41 32 22 14 9
------ ------- ------- ------- ------- ------- ------- -------- -------
Total revenues...................... 100 100 100 100 100 100 100 100 100
------ ------- ------- ------- ------- ------- ------- -------- -------
Costs and expenses:
Cost of revenues..................... 57 58 63 58 54 58 66 67 64
Network operations
and support.......................... 18 23 21 20 16 17 14 11 12
Sales and marketing.................. 24 31 32 30 21 21 21 18 16
General and administrative........... 14 17 14 18 12 15 21 8 7
Acquisition expenses................. -- -- -- -- -- -- -- 33 --
------ ------- ------- ------- ------- ------- ------- -------- -------
Total costs and expenses............ 113 129 130 126 103 111 122 137 99
------ ------- ------- ------- ------- ------- ------- -------- -------
Income (loss) from operations......... (13) (29) (30) (26) (3) (11) (22) (37) (1) 1
Interest income....................... -- 1 2 2 2 2 5 3 1
Interest expense...................... -- -- -- -- (1) (1) (1) (1) --
Equity in net loss of affiliates...... -- -- -- -- -- -- -- -- (1)
------ ------- ------- ------- ------- ------- ------- -------- -------
Income (loss) before income taxes..... (13) (28) (28) (24) (2) (10) (18) (35) (1) 1
Tax benefit (provision)............... -- -- (1) (1) -- 1 1 -- --
------ ------- ------- ------- ------- ------- ------- -------- -------
Net income (loss).................... (13)% (28)% (29)% (25)% (2)% (9)% (17)% (35)%(1) 1%
====== ======= ======= ======= ======= ======= ======= ======== =======
</TABLE>
(1) Reflects the incurrence of acquisition-related costs of approximately $11.1
million in connection with the acquisition of Unipalm.
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<PAGE>
As an aid to understanding the effect of the Unipalm acquisition on UUNET's
consolidated financial results, selected fiscal year data is presented below,
and should be read in conjunction with UUNET's Consolidated Financial Statements
included elsewhere in this Joint Proxy Statement - Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
1995 1994 1995 1994
------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
UUNET (parent company).. $ 23,981 $ 4,117 $ 57,375 $12,414
Unipalm Group plc....... 9,826 6,180 37,086 20,724
-------- ------- -------- -------
Consolidated
revenues........... $ 33,807 $10,297 $ 94,461 $33,138
======== ======= ======== =======
Net income (loss):
UUNET (parent company).. $ 1,219 $(2,289) $ 469 $(6,949)
Unipalm Group plc....... (2,018) (281) (7,659) (1,039)
Acquisition expense..... (11,067) -- (11,067) --
-------- ------- -------- -------
Consolidated
net loss........... $(11,866) $(2,570) $(18,257) $(7,988)
======== ======= ======== =======
</TABLE>
UUNET received net proceeds of approximately $107 million from equity
financings in 1993, 1994 and 1995, allowing UUNET to accelerate the expansion of
its network infrastructure and internal operations over the ten quarters ended
March 31, 1996. During this period, UUNET hired a significant number of senior
managers, greatly increased its sales force, significantly expanded its product
and services portfolio, and upgraded its network infrastructure. These
substantial expenses were incurred in anticipation of significant future growth,
and contributed to UUNET's 1993, 1994 and 1995 consolidated losses. In addition,
UUNET incurred acquisition-related costs of $11.1 million during the fourth
quarter of 1995 in connection with the Unipalm acquisition, which is accounted
for as a pooling of interests. Prior to October 1993, the expansion of UUNET's
network infrastructure and internal operations was funded primarily by cash flow
from operations.
In view of the significant growth of UUNET's consolidated operations,
management believes that period-to-period comparisons of consolidated financial
results should not be relied upon as an indication of future performance and
that UUNET may experience significant future period-to-period fluctuations in
operating results.
LIQUIDITY AND CAPITAL RESOURCES
UUNET historically has satisfied its cash requirements principally through
a combination of sales of equity securities, borrowings from banks and other
third parties, and cash flow from operations. In the second quarter of 1995,
UUNET completed its initial public offering, raising net proceeds of $67.7
million, and raised an additional $12.5 million from the exercise of warrants by
Microsoft. Unipalm raised net proceeds of $8.0 million during 1994 in
connection with its stock flotation in the United Kingdom. These funds have
been and will be used to fund the expansion of UUNET's network infrastructure
and internal operations, including purchases of capital
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<PAGE>
equipment and the hiring of additional personnel. In addition, Microsoft agreed
to lend UUNET up to $26.0 million to finance the capital equipment necessary to
build the dial-up network that is the primary Internet dial-up network and
infrastructure for The Microsoft Network. The interest rate on the loan from
Microsoft is equal to the greater of the Applicable Federal Rate ("AFR") in
effect on the date of the Microsoft Agreement (7.74%) or the AFR in effect at
the time of the advance (5.34% as of March 31, 1996). Borrowings available under
this facility totaled approximately $3.2 million as of March 31, 1996.
UUNET generated positive cash flow from operating activities of $1.5
million in 1993, negative cash flow from operating activities of $1.2 million in
1994 and positive cash flow from operating activities of $4.4 million in 1995.
UUNET generated positive cash flow from operating activities of $8.2 million
during the quarter ended March 31, 1996. Cash flow from operations can vary
significantly from period to period, depending upon the timing of operating cash
receipts and payments, especially accounts receivable, accounts payable and
accrued expenses. In addition, purchases of fixed assets increased from $3.1
million in 1993 to $9.4 million in 1994, and to $53.7 million in 1995, primarily
as a result of purchases of equipment to support the expansion of UUNET's
network infrastructure, and in 1995, as UUNET commenced deployment of the dial-
up network for Microsoft. Purchases of fixed assets totaled $25.3 million in the
quarter ended March 31, 1996 to support the continued expansion of UUNET's
domestic and international network infrastructure.
As of March 31, 1996, UUNET had commitments to certain vendors totaling
approximately $7.5 million to purchase network related equipment, $0.7 million
for other capital expenditures, and $0.9 million for advertising and promotional
activities. UUNET has guaranteed monthly usage levels to its primary
communications vendors. The commitments require monthly usage (exclusive of
discounts) through January 2009, which total approximately $130.9 million. UUNET
also has various agreements to lease and sublease office space, and as of March
31, 1996, minimum lease payments of approximately $23.7 million through April
2006. Of these commitments, which total $163.7 million, payments of $38.4
million are due in the remainder of 1996, $33.9 million are due in 1997 and
$91.4 million are due thereafter. The anticipated source of funds for such
commitments are current working capital, cash flow from operations, loan
advances from Microsoft and advances from MFS subsequent to the closing of the
Merger.
FORWARD LOOKING STATEMENTS
The following statements are based upon management's current expectations.
These statements are forward looking and actual results may differ materially.
These statements should be read in conjunction with, and are qualified by, the
other portion of Management's Discussion and Analysis of Financial Condition and
Results of Operations in this Joint Proxy Statement-Prospectus, UUNET's Report
on Form 10-Q for the three months ended March 31, 1996, and UUNET's entire
Annual Report on Form 10-K/A for the year ended December 31, 1995, including the
sections therein entitled "Risk Factors."
In anticipation of continued future growth, management intends to
accelerate the major international expansion it began in 1995, by obtaining
significant undersea and European terrestrial fiber optic cable capacity. The
extent and timing of obtaining fiber optic cable capacity will depend upon
various factors, many of which are external to UUNET, including, but not limited
to, the availability and cost of such capacity; the ability of UUNET to enter
into long-term leases, various alliances with carriers and others, or a
combination of these options; and the ability of UUNET to obtain other financing
for such capacity. Management also expects to continue to make significant
investments in its domestic and international network infrastructure and
internal operations over at least the next several years, and intends in 1996 to
substantially increase advertising and promotional activities as compared to
1995 (as it did in the first quarter of 1996); hire additional management,
sales, marketing and other key personnel; and expand its operations
geographically, in large part by further acquisitions and other commercial
arrangements.
Software revenues, generated by Unipalm, decreased 35% from $6.2 million in
the first quarter of 1995 to $4.0 million in the first quarter of 1996, and
represented 41% and 9%, respectively, of total revenues. UUNET expects that
software revenues will continue to decline as a percentage of total revenues,
and that the dollar amount of software revenues may further decline in future
periods.
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<PAGE>
As previously stated, except for the effect on software revenues, the
effect of price reductions due to competitive factors has not had a material
impact on revenue growth or profit margins during the first quarter of 1996 and
the year ended December 31, 1995. However, competitive factors could have a
material impact on future revenue growth and profit margins.
UUNET's consolidated quarterly operating results have fluctuated
significantly in the past and are expected to continue to fluctuate
significantly from period to period depending upon factors such as the
acquisition of assets and businesses both domestically and internationally, the
development of strategic alliances worldwide, the expansion of UUNET's network
infrastructure in terms of both scale and timing, the cost and timing of
advertising and marketing efforts, the timing and installation of significant
orders and the pricing and mix of services and products sold by UUNET. Other
factors which may cause quarterly fluctuations in operating results include
customer terminations of service, new product introductions by UUNET and its
competitors, market acceptance of new and enhanced versions of UUNET's products
and services, changes in pricing policies by its competitors and UUNET's ability
to obtain sufficient supplies of sole or limited source components. Although
UUNET achieved profitability on a consolidated basis for the quarter ended
March 31, 1996, there can be no assurance that UUNET will be able to sustain
profitability on a consolidated basis in the future. See "RISK FACTORS."
UUNET believes that its cash and cash equivalents and available borrowings
will be sufficient to meet its anticipated working capital requirements through
1996. However, UUNET will require additional financing to continue with its plan
to accelerate international expansion, make strategic acquisitions of other
Internet service providers or complementary businesses, acquire technologies or
develop new products or otherwise respond to unanticipated competitive
pressures. Management believes that UUNET will be able to obtain additional
financing through increases in existing credit facilities, new credit facilities
and leasing arrangements, strategic alliances or joint ventures. UUNET may also
consider other sources of financing. There can be no assurance that additional
financing will be available to UUNET when needed or on terms acceptable to
UUNET. If adequate funds are not available, UUNET has the flexibility to delay
or modify its expansion plans described above. See "RISK FACTORS."
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BUSINESS OF MFS
MFS provides facilities-based telecommunications systems and services to
business and government end users. MFS believes business and government users
have distinct telecommunications service requirements, including maximum
reliability, consistent high quality, substantial capacity for high-speed data
transmission, responsive customer service and continuous attention to service
enhancement and new service development. MFS believes it has significant
advantages over its competitors as a result of MFS': (i) focus on business and
government end users; (ii) expertise in developing and operating highly
reliable, advanced digital fiber optic networks which offer substantial
transmission capacity; (iii) emphasis on providing comprehensive and responsive
customer service; (iv) International Network Platform that serves customers with
multiple offices in key international business centers; (v) network development
plan which helps assure an efficient evolution from a voice-oriented circuit
switched network to a packet switched network based on Internet standards; (vi)
plan to develop new services, including voice service, to be provided over a
network based on Internet standards; and (vii) ability to bundle local, long
distance and Internet-related services provided over an end-to-end network
controlled by MFS.
MFS is organized as a holding company and operates through its subsidiaries
in two business segments: (i) telecommunications services and (ii) network
systems integration. Where permitted by local law, MFS provides
telecommunications services domestically and internationally in the form of: (i)
dedicated special access and private line circuits, local switched service and
high speed data communications to large business customers; (ii) single source
integrated local and long distance, high speed data communications services and
facilities management to medium and small businesses; and (iii) local access to
long distance companies and local access, ATM-based backbone services and
interconnection services via Network Access Points ("NAPs") to Internet service
providers.
MFS provides telecommunications services by utilizing its international
network platform, which consists of MFS owned transmission and switching
facilities and network capacity leased from other carriers primarily in the
United States and Western Europe. The MFS owned portion of the international
network platform consists of metropolitan area networks of fiber optic cables,
integrated local and long distance switches, advanced electronics, ATM switching
equipment, transmission equipment and associated wiring and equipment. In
addition, MFS has ownership interests in several international submarine cables.
The metropolitan area networks are generally linked to each other with leased
high capacity fiber optic lines. MFS provides international service through
several means, including leasing submarine cable capacity from international
carriers as well as taking ownership interests and obtaining indefeasible rights
of use capacity on other submarine cables. On May 7, 1996, MFS announced that it
intends to replace its leased lines by building or acquiring its own U.S.,
international and transoceanic fiber optic networks, to be deployed over a four
year period. MFS is now deploying its own fiber optic link between Washington,
D.C. and Boston.
The fiber optic cable utilized in MFS' networks typically contain from 12
to 144 optical fiber strands, each of which is capable of providing multiple
telecommunications channels or "circuits." Depending on transmission
electronics, a single pair of glass fibers on MFS' networks currently can
transmit 32,256 or more simultaneous voice conversations, whereas a typical pair
of copper wires generally can carry a maximum of 24 simultaneous voice
conversations. Although local exchange carriers (the "LECs") and foreign
telecommunications carriers have historically used copper wire in their
networks, they currently are deploying fiber optic cable to supplant or upgrade
portions of their copper-based networks, particularly in areas served by MFS.
MFS expects that continuing developments in telecommunications equipment will
increase the transmission capacity of each optical fiber, thereby providing even
greater capacity at relatively low incremental cost.
MFS' subsidiary, MFS Global Network Services, Inc. ("Global Network
Services") manages the operation and development of MFS' networks. MFS Global
Network Services contracts with another MFS subsidiary, MFS Network
Technologies, Inc. ("MFS Network Technologies") which engineers and manages the
construction of MFS' fiber optic networks. As each portion of a network is
completed, MFS Global Network Services manages the operation of the network.
Over time, MFS' network has evolved from "islands" of advanced fiber optic
networks within
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individual metropolitan areas, to an integrated international network
platform consisting of fiber optic cables either owned or leased by MFS.
MFS also plays a major role in making the Internet available to users
internationally through sales of dedicated circuits for local access and ATM-
based backbone service to Internet service providers. MFS is also one of several
companies that manage the operation of NAPs, through which significant amounts
of traffic on the Internet pass. MFS developed and manages NAPs that are known
as MAE East in Washington, D.C., MAE West in San Jose, California and MAE
Chicago in Chicago, Illinois.
Initially created to design and build MFS' networks in a high quality
and cost-effective manner, MFS Network Technologies, as a network system
integration service provider, also provides development, design and engineering,
project management, construction and support of networks and systems to a range
of third-party customers. It is an industry leader in the creation of advanced
communication and transportation systems, through the integration of advanced
technologies for telecommunications, transportation and security applications.
Additional information concerning MFS is included in the MFS Reports
incorporated by reference in this Joint Proxy Statement-Prospectus. See
"AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
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<PAGE>
GLOSSARY
ATM (asynchronous transfer mode)--An information transfer standard that is
one of a general class of packet technologies that relay traffic by way of an
address contained within the first five bytes of a standard fifty-three byte
long packet or cell. The ATM format can be used by many different information
systems, including LANs, to deliver traffic at varying rates, permitting a mix
of data, voice and video.
Backbone--A centralized high-speed network that interconnects smaller,
independent networks.
Bandwidth--The number of bits of information which can move through a
communications medium in a given amount of time.
CAP (competitive access provider)--A company that provides its customers
with an alternative to the LEC for local transport of private line and special
access telecommunications services.
Central offices--The switching centers or central switching facilities of
the LECs.
Co-carrier status--A regulatory scheme under which the incumbent LEC is
required to integrate new, competing providers of local exchange service, such
as the Company, into the systems of traffic exchange, inter-carrier
compensation, and other inter-carrier relationships that already exist among
LECs in most jurisdictions.
Collocation--The ability of a CAP such as MFS to connect its network to the
LECs central offices. Physical collocation occurs when a CAP places its network
connection equipment inside the LEC's central offices. Virtual collocation is an
alternative to physical collocation pursuant to which the LEC permits a CAP to
connect its network to the LEC's central offices on comparable terms, even
though the CAP's network connection equipment is not physically located inside
the central offices.
DS-1--A data communications circuit capable of transmitting data at 1.5
Mbps (sometimes called T-1).
DS-3--A data communications circuit capable of transmitting data at 45 Mbps
(sometimes called T-3).
Dedicated--Telecommunications lines dedicated or reserved for use by
particular customers.
Digital--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. The precise digital numbers minimize distortion (such
as graininess or snow in the case of video transmission, or static or other
background distortion in the case of audio transmission).
E-3--A data communications circuit capable of transmitting data at 34 Mbps
(typically used outside North America).
Ethernet--A local area network technology used for connecting computers,
printers, workstations, terminals, etc., within the same building. Ethernet
operates over twisted wire or coaxial cable at speeds up to 10 megabits per
second. Ethernet is the most popular LAN technology.
FCC--Federal Communications Commission.
FDDI (Fiber Distributed Data Interface)--Based on fiber optics, FDDI is a
100 megabit per second local area network technology used to connect computers,
printers, and workstations at very high speeds. FDDI is also used as backbone
technology to interconnect other LANs.
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Fiber mile--The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route mile" below.
Firewall--A system placed between networks that filters data passing
through it and removes unauthorized traffic, thereby enhancing the security of
the network.
Frame relay--An information transfer standard for relaying traffic based on
an address contained in the six byte header of a variable length packet that is
up to 2,106 bytes long. Frame relay has less overhead than ATM but may be
difficult to implement at speeds greater than 45 Mbps.
Graphical user interface--A means of communicating with a computer by
manipulating icons, menus and windows rather than using text commands.
Home page--An entry point for a collection of information presented through
the World Wide Web.
Interconnection Decisions--Rulings by the FCC announced in September 1992
and August 1993, which require the BOCs and most other large LECs to provide
interconnection in LEC central offices to any CAP, long distance carrier or end
user seeking such interconnection for the provision of interstate special access
and switched access transport services.
Internet--A global collection of interconnected computer networks which use
TCP/IP, a common communications protocol.
ISDN--Integrated Services Digital Network. An information transfer standard
for transmitting digital voice and data over telephone lines at speeds up to 128
Kbps.
Kbps--Kilobits per second. A transmission rate. One kilobit equals 1,024
bits of information.
LANs (local area networks)--The interconnection of computers for the
purpose of sharing files, programs and various devices such as printers and
high-speed modems. LANs may include dedicated computers or file servers that
provide a centralized source of shared files and programs.
Local exchange--A geographic area determined by the appropriate state
regulatory authority in which calls generally are transmitted without toll
charges to the calling or called party.
LECs (local exchange carrier)--A company providing local telephone
services.
Long distance carriers (interexchange carriers)--Long distance carriers
provide services between local exchanges on an interstate or intrastate basis.
A long distance carrier may offer services over its own or another carrier's
facilities.
Mbps--Megabits per second. A transmission rate. One megabit equals 1,024
kilobits.
Modem--A device for transmitting digital information over an analog
telephone line.
Network systems integration--Involves the creation of turnkey
telecommunications networks and systems including: (i) route and site
selection, (ii) rights of way and legal authorizations and/or acquisition; (iii)
design and engineering of the system, including technology and vendor assessment
and selection, determining fiber optic circuit capacity, and establishing
reliability/flexibility standards; and (iv) project and construction management,
including contract negotiations, purchasing and logistics, installation as well
as testing and construction management.
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<PAGE>
Number portability--The ability of an end user to change local exchange
carriers while retaining the same telephone number.
On-line services--Commercial information services that offer a computer
user access to a specified slate of information, entertainment and
communications menus on what appears to be a single system.
POPs (points of presence)--With respect to voice communications, locations
where a long distance carrier has installed transmission equipment in a service
area that serves as, or relays calls to, a network switching center of that long
distance carrier, and with respect to a data communications network, geographic
areas within which the communications network allows local access.
PPP--Point-to-Point-Protocol. An information transfer standard for
transmitting packets over data connections between two points.
PUC (public utility commission)--A state regulatory body, established in
most states, which regulates utilities, including telephone companies providing
intrastate services.
Private line--A dedicated telecommunications connection between end user
locations.
Public switched network--That portion of a LEC's network available to all
users generally on a shared basis (i.e., not dedicated to a particular user).
Traffic along the public switched network is generally switched at the LEC's
central offices.
Reciprocal compensation--The same compensation of a new competitive local
exchange carrier for termination of a local call by the BOC on its network, as
the new competitor pays the BOC for termination of local calls on the BOC
network.
Resale--The provision by a provider of telecommunications services to other
providers or carriers on a wholesale basis for use by such carrier to provide
services to its own end users.
Route mile--The number of miles of the telecommunications path in which
fiber optic cables are installed.
Router--A system placed between networks that relays data to those networks
based upon a destination address contained in the data packets being routed.
SLIP--Serial Line Internet Protocol. An information transfer standard for
transmitting Internet Protocol packets over asynchronous data connections
between two points.
Special Access Services--The lease of private dedicated telecommunications
lines or circuits along the network of a LEC or a CAP which lines run to or from
the long distance carrier POP.
Switch--A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
Switched access transport services--Transportation of switched traffic
along dedicated lines between the LEC central offices and long distance carrier
POPs.
Switched traffic--Telecommunications traffic along the public switched
network. This traffic is generally switched at the LEC's central offices.
TCP/IP--Transmission Control Protocol/Internet Protocol. A suite of network
protocols that allow computers with different architectures and operating system
software to communicate with other computers on the Internet.
T-1--A data communications circuit capable of transmitting data at 1.5 Mbps
(sometimes called DS-1).
T-3--A data communications circuit capable of transmitting data at 45 Mbps
(sometimes called DS-3).
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Token Ring--A local area network technology used to interconnect personal
computers, file servers, printers, and other devices. Token Ring LANs typically
operate at either 4 megabits per second or 16 megabits per second.
Unbundled Access--Access by competitive telecommunications carriers to
unbundled elements of a telecommunications service provider's network
facilities, equipment, feature, function and capabilities, at any technically
feasible point within the network.
Unix--A computer operating system frequently found on workstations and PCs
and noted for its portability and communications functionality.
UUCP--Unix to Unix Copy Protocol. A transmission protocol usually found on
Unix systems that is commonly used to transfer electronic mail and news.
World Wide Web or Web--A collection of computer systems supporting a
communications protocol that permits multi-media presentation of information
over the Internet.
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<PAGE>
COMPARATIVE PER SHARE PRICES
MFS
The MFS Common Stock trades on Nasdaq under the symbol "MFST." The
following table sets forth the high and low sale prices of the MFS Common Stock
as reported by Nasdaq for each of the quarters in the two-year period ended
December 31, 1995 and for the first quarter of 1996, which prices give effect a
2-for-1 stock split which was payable on April 26, 1996.
<TABLE>
<CAPTION>
1994 High Low
---- ------- -------
<S> <C> <C>
First Quarter $20.625 $14.000
Second Quarter 17.000 10.250
Third Quarter 18.375 12.250
Fourth Quarter 20.750 16.250
1995
----
First Quarter $19.500 $15.375
Second Quarter 18.625 14.375
Third Quarter 24.500 15.875
Fourth Quarter 26.875 19.125
1996
----
First Quarter $34.00 $28.875
Second Quarter (to ___, 1996)
</TABLE>
On April 29, 1996, the last sales price of the MFS Common Stock on Nasdaq
was $34.625. The public announcement of the Merger Agreement occurred prior to
the opening of trading on April 30, 1996.
UUNET
Since May 25, 1995, the UUNET Common Stock trades on Nasdaq under the symbol
"UUNT." The following table sets forth the high and low sale prices of the
UUNET Common Stock as reported by Nasdaq for each of the quarters in the period
ended December 31, 1995 and for the first quarter of 1996.
<TABLE>
<CAPTION>
1995 High Low
---- ------- -------
<S> <C> <C>
Second Quarter $28.500 $21.750
Third Quarter 51.750 27.250
Fourth Quarter 98.750 38.750
1996
----
First Quarter $62.500 $25.000
Second Quarter (to ____, 1996)
</TABLE>
On April 29, 1996, the last sales price of the UUNET Common Stock on Nasdaq
was $48.250. The public announcement of the Merger Agreement occurred prior to
the opening of trading on April 30, 1996.
EQUIVALENT PER SHARE DATA
The following tables set forth certain data concerning the historical book
value per share, cash dividends declared per share and income (loss) per share
from continuing operations for MFS and UUNET, respectively, on a
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pro forma basis after giving effect to the Merger and on a pro forma basis after
giving effect to the exercise of the Option. The pro forma combined data are
presented for comparative purposes only and are not necessarily indicative of
what the actual financial position and results of operations would have been as
of and for the periods ended December 31, 1995 and March 31, 1996 had the Merger
or exercise of the Option been consummated nor does such data purport to
represent results for future periods. The information should be read in
conjunction with the unaudited Pro Forma Consolidated Condensed Financial
Statements of MFS contained elsewhere in this Joint Proxy Statement-Prospectus,
the historical financial statements of MFS incorporated herein by reference and
the historical financial statements of UUNET contained elsewhere herein. The
unaudited pro forma equivalent per share data shows for each share of MFS Common
Stock and UUNET Common Stock before the Merger and the exercise of the Option,
its equivalent position after giving effect to the Merger and the exercise of
the Option. UUNET stockholders will receive 1.777776 shares of MFS Common Stock
for each share of UUNET Common Stock outstanding .
Historical
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1996 December 31, 1995
------------------ -----------------
MFS UUNET MFS UUNET
------ ------ ------ ------
<S> <C> <C> <C> <C>
Book value per share.................... $ 6.01 $ 2.55 $ 6.67 $ 2.52
Cash dividends per share................ -- -- -- --
Income (loss) per share from continuing
operations (0.75) 0.01 (2.21) (0.63)
</TABLE>
MFS - Pro Forma
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1996 December 31, 1995
------------------ -----------------
Merger Option Merger Option
------ ------ ------ ------
<S> <C> <C> <C> <C>
Book value per share.................... $15.62 $12.33 $16.13 $12.88
Cash dividends per share................ -- -- -- --
Income (loss) per share from continuing
operations (1.09) (0.97) (3.92) (3.33)
</TABLE>
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UUNET - PRO FORMA EQUIVALENTS
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1996 December 31, 1995
------------------ -----------------
Merger Option Merger Option
------ ------ ------ ------
<S> <C> <C> <C> <C>
Book value per share.................... $27.77 $21.91 $28.67 $22.90
Cash dividends per share................ -- -- -- --
Income (loss) per share from continuing
operations............................. (1.94) (1.72) (6.97) (5.92)
</TABLE>
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<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS - THE MERGER
The following unaudited pro forma consoliated condensed financial
statements give effect to the merger of UUNET with Sub pursuant to the Merger
Agreement. The pro forma consolidated condensed balance sheet assumes that the
Merger occurred on March 31, 1996. The pro forma consolidated condensed
statements of operations assume that the Merger occurred as of January 1, 1995.
The pro forma consolidated condensed financial statements are not necessarily
indicative of the results that actually would have been attained if the Merger
had been in effect on the dates indicated or which may be attained in the
future. Such statements should be read in conjunction with the MFS and UUNET
historical consolidated financial statements and notes thereto incorporated by
reference or included herein.
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MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION> UUNET
MFS COMMUNICATIONS TECHNOLOGIES, PRO FORMA
COMPANY, INC. INC. ADJUSTMENTS PRO FORMA
------------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue $ 186,316 $43,013 $ (1,322)(4) $ 228,007
Costs and expenses:
Operating expenses 174,173 35,568 (1,322)(4) 208,419
Depreciation and amortization 44,609 3,948 105,907 (1) 154,464
General and administrative
expenses 34,892 3,126 - 38,018
------------ ------- ---------- ------------
253,674 42,642 104,585 400,901
------------ ------- ---------- ------------
Income (loss) from operations (67,358) 371 (105,907) (172,894)
Other income (expense):
Interest income 5,644 577 - 6,221
Interest expense (23,626) (329) - (23,955)
Other (784) (386) - (1,170)
------------ ------- ---------- ------------
Total other income (expense) (18,766) (138) - (18,904)
------------ ------- ---------- ------------
Income (loss) before income taxes (86,124) 233 $ (105,907) (191,798)
Income tax expense (100) - - (100)
------------ ------- ---------- ------------
Net income (loss) (86,224) 233 (105,907) (191,898)
Dividends on preferred stock (7,072) - - (7,072)
------------ ------- ---------- ------------
Net income (loss) applicable to common
stockholders $ (93,296) $ 233 $ (105,907) $ (198,970)
============ ======= ========== ============
Weighted average number of
shares outstanding 125,017,000 57,248,000 (6) 182,265,000
============ ========== ============
Pro forma net loss per share applicable
to common stockholders $(0.75) $(1.09)
============ ============
</TABLE>
See accompanying notes to pro forma consolidated condensed financial statements.
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<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION> UUNET
MFS COMMUNICATIONS TECHNOLOGIES, PRO FORMA
COMPANY, INC. INC. ADJUSTMENTS PRO FORMA
------------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 583,194 $ 94,461 $ (5,845)(4) $ 671,810
Costs and expenses:
Operating expenses 562,300 82,906 (5,845)(4) 639,361
Depreciation and amortization 142,496 8,322 423,628 (1) 574,446
General and administrative
expenses 117,703 12,709 - 130,412
Other - 11,067 - 11,067
------------ -------- ----------- ------------
822,499 115,004 417,783 1,355,286
------------ -------- ----------- ------------
Loss from operations (239,305) (20,543) (423,628) (683,476)
Other income (expense):
Interest income 13,188 2,747 - 15,935
Interest expense (38,606) (808) - (39,414)
Other (2,575) (127) - (2,702)
------------ -------- ----------- ------------
Total other income (expense) (27,993) 1,812 - (26,181)
------------ -------- ----------- ------------
Loss before income taxes (267,298) (18,731) (423,628) (709,657)
Income tax (expense) benefit (600) 474 (474) (5) (600)
------------ -------- ----------- ------------
Net loss (267,898) (18,257) (424,102) (710,257)
Dividends on preferred stock (15,064) - - (15,064)
------------ -------- ----------- ------------
Net loss applicable to common
stockholders $ (282,962) $(18,257) $ (424,102) $ (725,321)
============ ======== =========== ============
Weighted average number of shares
outstanding (after stock split) 127,786,000 57,248,000 (6) 185,034,000
============ =========== ============
Net loss per share applicable
to common stockholders $(2.21) $(3.92)
============ ============
</TABLE>
See accompanying notes to pro forma consolidated condensed financial statements.
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<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1996
(DOLLARS IN THOUSANDS-UNAUDITED)
<TABLE>
<CAPTION> UUNET
MFS COMMUNICATIONS TECHNOLOGIES, PRO FORMA
COMPANY, INC. INC. ADJUSTMENTS PRO FORMA
------------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 92,588 $ 45,413 - $ 138,001
Marketable securities 368,266 - - 368,266
Accounts receivable and other assets 260,860 28,525 - 289,385
---------- -------- ------------- ----------
Total current assets 721,714 73,938 - 795,652
Networks and equipment, at cost 1,466,254 93,261 - 1,559,515
Less accumulated depreciation
and amortization (245,321) (17,384) - (262,705)
---------- -------- ------------- ----------
Networks and equipment, net 1,220,933 75,877 - 1,296,810
Goodwill, net 279,970 166 $ 1,898,309 (1) 2,178,445
Other assets, net 124,594 6,297 $ 135,500 (1) 266,391
---------- -------- ------------- ----------
Total assets $2,347,211 $156,278 $ 2,033,809 $4,537,298
========== ======== ============= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 168,235 $ 17,824 - 186,059
Other current liabilities 99,421 38,325 14,400 (2) 152,146
---------- -------- ------------- ----------
Total current liabilities 267,656 56,149 14,400 338,205
Notes payable and long-term debt,
less current portion 1,255,256 18,045 - 1,273,301
Other liabilities and minority interest 69,717 - - 69,717
Stockholders' equity:
Preferred stock, $.01 par value.
Series A, 8% cumulative convertible 1 - - 1
Series B, 7 3/4% cumulative
convertible 150 - - 150
Common stock 1,255 32 (32)(3)
573 (6) 1,828
Additional paid-in capital 1,482,442 109,328 (109,328)(3)
2,100,920 (6) 3,583,362
Other (1,956) 44 (44)(3) (1,956)
Accumulated deficit (727,310) (27,320) 27,320 (3) (727,310)
---------- -------- ------------- ----------
Total stockholders' equity 754,582 82,084 2,019,409 2,856,075
---------- -------- ------------- ----------
Total liabilities and
stockholders' equity $2,347,211 $156,278 $ 2,033,809 $4,537,298
========== ======== ============= ==========
</TABLE>
See accompanying notes to pro forma consolidated condensed financial statements.
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<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1: PRO FORMA STATEMENTS
The pro forma information as of, and for, the three months ended March 31, 1996
is based on unaudited financial statements after giving effect to the
preliminary allocation of the purchase price and the adjustments described in
Note 2. The pro forma information for the year ended December 31, 1995 is based
on historical financial statements of the MFS and UUNET after giving effect to
the adjustments described in Note 2.
The unaudited pro forma consolidated condensed financial statements may not be
indicative of the results that actually would have been achieved if the
acquisition had occurred on the dates assumed and do not project MFS' financial
position or results of operations at any future date or period then ended.
NOTE 2: PRO FORMA ADJUSTMENTS
(1) Reflects the excess of the purchase price over the net book value which
approximates fair value) of the net tangible assets acquired which was
recorded as goodwill, a customer contract and customer list. The
pro forma adjustment to depreciation and amortization represents the
amortization of the goodwill and other intangibles and was calculated using
the straightline method over a five year life for goodwill and three to
four year lives for the other intangibles.
(2) Reflects liabilities incurred, such as compensation costs and legal,
accounting and consulting fees, related to the Merger.
(3) Reflects the elimination of the equity accounts of UUNET.
(4) Reflects the elimination of intercompany revenues and expenses.
(5) Reflects adjustment of federal income tax expense for the effects of the
Merger.
(6) Reflects the effect of the issuance of MFS common stock and options to
purchase MFS Common Stock as consideration for the UUNET common stock and
options to purchase UUNET common stock, respectively, in connection with
the Merger. The MFS common stock was valued at $34.69 per share for
purposes of calculating the Merger consideration.
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<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - EXERCISE OF OPTION
The following unaudited pro forma consolidated condensed financial
statements give effect to the exercise of the Option to purchase [----------]
shares of UUNET Common Stock (representing approximately [--]% of the
outstanding shares of UUNET Common Stock outstanding at the UUNET Record Date)
by MFS pursuant to the Stock Option Agreement. The pro forma consolidated
condensed balance sheet assumes that the exercise of the Option occurred on
March 31, 1996. The pro forma consolidated condensed statements of operations
assume that the exercise of the Option occurred as of January 1, 1995. The pro
forma consolidated condensed financial statements are not necessarily indicative
of the results that actually would have been attained if the exercise of the
Option had been in effect on the dates indicated or which may be attained in the
future. Such statements should be read in conjunction with the MFS and UUNET
historical consolidated financial statements and notes thereto either included
or incorporated herein by reference.
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<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MFS COMMUNICATIONS UUNET PRO FORMA
COMPANY, INC. TECHNOLOGIES, INC. ADJUSTMENTS PRO FORMA
------------------ ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 186,316 $43,013 $(1,322)(4)$ 228,007
Costs and expenses:
Operating expenses 174,173 35,568 (1,322)(4) 208,419
Depreciation and amortization 44,609 3,948 62,348 (1) 110,905
General and administrative
expenses 34,892 3,126 - 38,018
------------ ------- ----------- ------------
253,674 42,642 61,026 357,342
------------ ------- ----------- ------------
Income (loss) from operations (67,358) 371 (62,348) (129,335)
Other income (expense):
Interest income 5,644 577 - 6,221
Interest expense (23,626) (329) - (23,955)
Other (784) (386) (89)(7) (1,259)
------------ ------- ----------- ------------
Total other income (expense) (18,766) (138) (89) (18,993)
------------ ------- ----------- ------------
Income (loss) before income taxes (86,124) 233 (62,437) (148,328)
Income tax expense (100) - - (100)
------------ ------- ----------- ------------
Net income (loss) (86,224) 233 (62,437) (148,428)
Dividends on preferred stock (7,072) - - (7,072)
------------ ------- ----------- ------------
Net income (loss) applicable to common
stockholders $ (93,296) $ 233 $ (62,437) $ (155,500)
============ ======= =========== ============
Weighted average number of
shares outstanding 125,017,000 - 35,494,000 160,511,000
============ ======= =========== ============
Pro forma net loss per share applicable
to common stockholders $(0.75) $(0.97)
============ ============
</TABLE>
See accompanying notes to pro forma consolidated condensed financial statements.
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<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MFS COMMUNICATIONS UUNET PRO FORMA
COMPANY, INC. TECHNOLOGIES, INC. ADJUSTMENTS PRO FORMA
------------------ ------------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenue $ 583,194 $ 94,461 $(5,845)(4) $ 671,810
Costs and expenses:
Operating expenses 562,300 82,906 (5,845)(4) 639,361
Depreciation and amortization 142,496 8,322 249,393 (1) 400,211
General and administrative
expenses 117,703 12,709 - 130,412
Other - 11,067 - 11,067
------------ -------- ----------- ------------
822,499 115,004 243,548 1,181,051
------------ -------- ----------- ------------
Loss from operations (239,305) (20,543) (249,393) (509,241)
Other income (expense):
Interest income 13,188 2,747 - 15,935
Interest expense (38,606) (808) - (39,414)
Other (2,575) (127) 6,938(7) 4,236
------------ -------- ----------- ------------
Total other income (expense) (27,993) 1,812 6,938 (19,243)
------------ -------- ----------- ------------
Loss before income taxes (267,298) (18,731) (242,455) (528,484)
Income tax (expense) benefit (600) 474 (474)(5) (600)
------------ -------- ----------- ------------
Net loss (267,898) (18,257) (242,929) (529,084)
Dividends on preferred stock (15,064) - - (15,064)
------------ -------- ----------- ------------
Net loss applicable to common
stockholders $ (282,962) $(18,257) $ (242,929) $ (544,148)
============ ======== =========== ============
Weighted average number of shares
outstanding (after stock split) 127,786,000 35,494,000 163,280,000
============ =========== ============
Net loss per share applicable
to common stockholders $(2.21) $ (3.33)
============ ============
</TABLE>
See accompanying notes to pro forma consolidated condensed financial statements.
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<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1996
(DOLLARS IN THOUSANDS-UNAUDITED)
<TABLE>
<CAPTION> UUNET
MFS COMMUNICATIONS TECHNOLOGIES, PRO FORMA
COMPANY, INC. INC. ADJUSTMENTS PRO FORMA
------------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 92,588 $ 45,413 $ - $ 138,001
Marketable securities 368,266 - - 368,266
Accounts receivable and other assets 260,860 28,525 - 289,385
---------- -------- ---------- ----------
Total current assets 721,714 73,938 - 795,652
Networks and equipment, at cost 1,466,254 93,261 - 1,559,515
Less accumulated depreciation
and amortization (245,321) (17,384) - (262,705)
---------- -------- ---------- ----------
Networks and equipment, net 1,220,933 75,877 - 1,296,810
Goodwill, net 279,970 166 1,110,669(1) 1,390,805
Other assets, net 124,594 6,297 84,010(1) 214,901
---------- -------- ---------- ----------
Total assets $2,347,211 $156,278 $1,194,679 $3,698,168
========== ======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 168,235 $ 17,824 $ - $ 186,059
Other current liabilities 99,421 38,325 14,400(2) 152,146
---------- -------- ---------- ----------
Total current liabilities 267,656 56,149 14,400 338,205
Notes payable and long-term debt,
less current portion 1,255,256 18,045 - 1,273,301
Other liabilities and minority interest 69,717 - 31,192(7) 100,909
Stockholders' equity:
Preferred stock, $.01 par value.
Series A, 8% cumulative convertible 1 - - 1
Series B, 7 3/4% cumulative
convertible 150 - - 150
Common stock 1,255 32 (32)(3)
355 (6) 1,610
Additional paid-in capital 1,482,442 109,328 (109,328)(3)
1,230,816 (6) 2,713,258
Other (1,956) 44 (44)(3) (1,956)
Accumulated deficit (727,310) (27,320) 27,320 (3) (727,310)
---------- -------- ---------- ----------
Total stockholders' equity 754,582 82,084 1,149,087 1,985,753
---------- -------- ---------- ----------
Total liabilities and
stockholders' equity $2,347,211 $156,278 $1,194,679 $3,698,168
========== ======== ========== ==========
</TABLE>
See accompanying notes to pro forma consolidated condensed financial statements.
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<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1: PRO FORMA STATEMENTS
The pro forma information as of, and for the three months ended March 31, 1996
is based on unaudited financial statements after giving effect to the
preliminary allocation of the purchase price and the adjustments described in
Note 2. The pro forma information for the year ended December 31, 1995 is based
on historical financial statements of MFS and UUNET after giving effect to the
adjustments described in Note 2.
The unaudited pro forma consolidated condensed financial statements may not be
indicative of the results that actually would have been achieved if the
Option had been exercised on the dates assumed and do not project MFS' financial
position or results of operations at any future date or period then ended.
NOTE 2: PRO FORMA ADJUSTMENTS
(1) Reflects the excess of the purchase price over the net book value (which
approximates fair value) of the net tangible assets acquired which was
recorded as goodwill, a customer contract and customer list. The
pro forma adjustment to depreciation and amortization represents the
amortization of the goodwill and other intangibles and was calculated using
the straightline method over a five year life for goodwill and three to
four year lives for the other intangibles.
(2) Reflects liabilities incurred, such as Compensation costs and legal,
accounting and consulting fees, related to the exercise of the Option.
(3) Reflects the elimination of the equity accounts of UUNET.
(4) Reflects the elimination of intercompany revenues and expenses.
(5) Reflects adjustment of federal income tax expense for the effects of the
exercise of the Option.
(6) Reflects the effect of the issuance of MFS' common stock to exercise the
Option. The MFS Common Stock was valued at $34.69 per share for purposes of
calculating the consideration paid to exercise the Option.
(7) Reflects the effect of minority interest for the 38% of UUNET Common Stock
assumed held by stockholders other than MFS.
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<PAGE>
DESCRIPTION OF MFS CAPITAL STOCK
The summary of the terms of the stock of MFS set forth below does not
purport to be complete and is subject to and qualified in its entirety by
reference to the MFS Amended & Restated Certificate and the MFS By-laws.
GENERAL
The aggregate number of shares of capital stock of all classes which MFS
has authority to issue is 425,000,000, of which 400,000,000 shares are MFS
Common Stock, $.01 par value, and 25,000,000 shares are preferred stock, $.01
par value (the "MFS Preferred Stock"). The issued and outstanding shares of MFS
Common Stock and MFS Preferred Stock, are duly authorized, validly issued, fully
paid and nonassessable.
The additional shares of authorized stock available for issuance by MFS
might be issued at such times and under such circumstances as to have a dilutive
effect on earnings per share and on the equity ownership of the holders of MFS
Common Stock. The ability of the MFS Board of Directors to issue additional
shares of stock could enhance the MFS Board of Directors' ability to negotiate
on behalf of the stockholders in a takeover situation and also could be used by
the MFS Board of Directors to make a change in control more difficult, thereby
denying stockholders the potential to sell their shares at a premium and
entrenching current management.
COMMON STOCK
Subject to the senior rights of Preferred Stock which may from time to time
be outstanding, holders of MFS Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. Upon dissolution and liquidation, holders of MFS Common
Stock are entitled to a ratable share of the net assets of MFS remaining after
payment to the holders of the MFS Preferred Stock of the full preferential
amounts to which they are entitled. All outstanding shares of MFS Common Stock
are fully paid and nonassessable.
The holders of MFS Common Stock are entitled to one vote per share for the
election of Directors and on all other matters submitted to a vote of
stockholders. Holders of Common Stock are not entitled to cumulative voting for
the election of Directors. They are not entitled to preemptive rights.
The transfer agent and registrar for the MFS Common Stock is Continental
Stock Transfer & Trust Company.
As of the date of this Joint Proxy Statement-Prospectus, there are
125,804,234 shares of MFS Common Stock outstanding after giving effect to a 2-
for-1 stock split effected in the form of a stock dividend which was payable on
April 26, 1996. The MFS Common Stock is traded on Nasdaq under the symbol
"MFST."
PREFERRED STOCK
The MFS Preferred Stock has priority over the MFS Common Stock with respect
to dividends and to other distributions, including the distribution of assets
upon liquidation. The MFS Board of Directors is authorized to fix and determine
the terms, limitations and relative rights and preferences of the MFS Preferred
Stock, to establish series of MFS Preferred Stock and to fix and determine the
variations as among series. The MFS Board of Directors without stockholder
approval could issue MFS Preferred Stock with voting and conversion rights which
could adversely affect the voting power of the holders of MFS Common Stock.
Outstanding MFS Preferred consists of 95,000 shares of Series A Preferred,
which were issued on May 23, 1995 in connection with the sale of 9,500,000
Depositary Shares, each representing a one one-hundredth interest in a share of
Series A Preferred and 15,000,000 shares of Series B Preferred.
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<PAGE>
The liquidation preference of each share of Series A Preferred is an amount
equal to the greater of (i) the sum of (a) $3,350 and (b) all accrued and unpaid
dividends thereon to the date of liquidation, dissolution or winding up and (ii)
the value of the fraction of a share of MFS Common Stock into which the Series A
Preferred is convertible on the date of such liquidation, dissolution or winding
up. Dividends on the Series A Preferred and the Depositary Shares representing
such Series A Preferred are cumulative from the date of original issue and are
payable quarterly in arrears at the rate of $268.00 per annum per share of
Series A Preferred (equivalent to $2.68 per annum per Depositary Share). The
Depositary Shares representing such Series A Preferred may be redeemed for cash
at the option of MFS, in whole or in part, at a call price of the sum of (i)
$34.170 on and after the Initial Redemption Date through August 30, 1998,
$34.003 on and after August 31, 1998 through November 29, 1998, $33.835 on and
after November 30, 1998 through February 27, 1999, $33.668 on and after February
28, 1999 through April 29, 1999, and $33.50 on and after April 30, 1999, until
May 31, 1999, plus (ii) all accrued and unpaid dividends thereon to the date
fixed for redemption. The Series A Preferred and the Depositary Shares
representing such Series A Preferred are mandatorily convertible into an
aggregate of 19,000,000 shares of MFS Common Stock.
Each share of Series A Preferred is entitled to 10 votes per share
with respect to the election of directors of MFS and each other matter coming
before any meeting of MFS stockholders. The holders of the Series A Preferred
and the holders of MFS Common Stock will vote together as a single class,
unless otherwise provided by law or the Restated Certificate of MFS. The
approval of more than two-thirds of the votes entitled to be cast by the holders
of issued and outstanding shares of Series A Preferred is required to amend the
Amended and Restated Certificate of MFS or to materially, adversely changes the
rights, preferences or privileges of the Series A Preferred. The holders of the
outstanding shares of Series A Preferred shall also have the right, voting
together with the holders of any other outstanding shares of Voting Preferred
Stock (as hereinafter defined) as a separate voting group, to elect two members
of the Board of Directors of MFS at any time six or more quarterly dividends on
any shares of Voting Preferred Stock shall be in arrears and unpaid, in whole or
in part, whether or not declared and whether or not any funds shall be or have
been legally available for payment thereof. For this purpose, "Voting Preferred
Stock" shall mean the shares of Series A Preferred and each other series of
Preferred Stock which shall have substantially similar voting rights (including
voting as one voting group with other shares of Voting Preferred Stock) with
respect to the election of directors upon substantially similar arrearages of
dividends. In such event, the number of Directors of MFS shall be increased by
two, and, unless a regular meeting of the stockholders of MFS is to be held
within 60 days thereof for the purpose of electing Directors, within 30 days
thereafter, MFS shall call a special meeting of the holders of the outstanding
shares of Voting Preferred Stock for the purpose of electing such Directors. If
such special meeting shall not have been so called by MFS, or such regular
meeting shall not be so held, a special meeting may be called for such purpose
at the expense of MFS by the holders of not less than 10% of the outstanding
shares of any series of Voting Preferred Stock; and notice of any such special
meeting shall be given by the person or persons calling the same to the holders
of the outstanding shares of the Voting Preferred Stock. At any such special
meeting the holders of the outstanding shares of Voting Preferred Stock (voting
separately as a class with each share having one vote) shall elect two members
of the Board of Directors of MFS. If a regular meeting of the stockholders of
MFS for the purpose of electing Directors is to be held within 60 days after the
time the holders of the outstanding shares of Voting Preferred Stock become so
entitled to elect two Directors, then at such regular meeting, the holders of
the outstanding shares of Voting Preferred Stock (voting separately as a class
with each share having one vote) shall elect two members of the Board of
Directors. The right of the holders of the Voting Preferred stock (voting
separately as a class) to elect two members of the Board of Directors of MFS
shall continue until such time as no dividends on any outstanding shares of
Voting Preferred Stock are in arrears and unpaid, in whole or in part, at which
time (i) the voting power of the holders of the outstanding shares of Voting
Preferred Stock so to elect two Directors shall cease, but always subject to the
vesting of such voting power upon the occurrence of each and every like
arrearage of dividends, and (ii) the term of office of each member of the Board
of Directors who was elected pursuant to this provision shall automatically
expire.
The Series B Preferred is convertible into shares of MFS Common Stock at any
time after the first anniversary of the date of issuance (September 30, 1996) at
a conversion price of $21.563. Each share of Series B Preferred is convertible
into 0.0463768 shares of MFS Common Stock, or an aggregate of 695,652 shares of
MFS Common Stock. Dividends on the Series B Preferred accrue at the rate of 7
3/4% per annum and are payable in
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<PAGE>
cash. Dividends will be paid only when, as and if declared by the Board. The
liquidation preference on each share of Series B Preferred is $1.00, plus all
accrued and unpaid dividends thereon to the date of liquidation, dissolution or
winding up. The Series B Preferred cannot be redeemed by MFS prior to
September 30, 2001. Each share of Series B Preferred is entitled to 10 votes per
share with respect to any and all matters presented to the MFS stockholders for
their action and holders of MFS Common Stock as a single class unless otherwise
required by law or the proposed action amends, alters or repeals the
preferences, special rights or other powers of the Series B Preferred. The
shares of Series B Preferred, however, are held subject to an irrevocable proxy
that has been granted to the Secretary and Assistant Secretary of MFS to vote
all shares of Series B Preferred on all matters, other than the election
of directors and matters as to which the holders of Series B Preferred vote as a
separate class, in proportion to the holders of MFS Common Stock. The Series B
Preferred is non-transferable for a period of six years from its issuance date,
with limited exceptions, and is redeemable at the option of MFS at the end of
such six-year period. Accordingly, the Series B Preferred has no realizable
resale value until the earlier of its conversion into MFS Common Stock at the
option of the holder or the expiration of the six-year transfer restriction.
MFS has also authorized 75,000 shares to be issued as Series C Junior
Participating Preferred Stock (the "Series C Preferred"). A description of the
terms of the Series C Preferred is set forth below under "--Preferred Stock
Purchase Rights."
PREFERRED STOCK PURCHASE RIGHTS
In September 1995, MFS adopted the MFS Rights Plan and in connection
therewith entered into the MFS Rights Agreement. To implement the MFS Rights
Plan, the MFS Board of Directors authorized the issuance of one MFS Right for
each share of MFS Common Stock outstanding as of October 2, 1995 and issued
thereafter until the Distribution Date (as defined in the MFS Rights Agreement).
Each MFS Right entitles the holder to purchase from MFS one one-thousandth of a
share of Series C Preferred at an initial purchase price of $300, subject to
adjustment. The MFS Rights expire on September 30, 2005, unless extended or
earlier redeemed by MFS.
The MFS Rights separate from the MFS Common Stock and a Distribution Date
occurs upon the earlier of 10 days following public disclosure that certain
persons or groups of persons have become a beneficial owner of 15% or more of
the outstanding MFS Common Stock (an "Acquiring Person") or 10 business days
following the commencement of a tender offer or exchange offer that would result
in certain persons or groups becoming an Acquiring Person. Upon the occurrence
of a Distribution Date, each holder of a MFS Right has the right to receive,
upon exercise of the right, MFS Common Stock having a value equal to two times
the exercise price of the MFS Right, except that all MFS Rights held by an
Acquiring Person become null and void.
In the event that a person becomes an Acquiring Person and MFS is acquired
in a merger or other business combination in which MFS is not the surviving
corporation or more than 50% of the assets or earning power of MFS' assets are
sold or transferred, each holder, except for Acquiring Persons, of a MFS Right
has the right to receive, upon exercise, common stock of the acquiring company
which has a value equal to two times the exercise price of the MFS Right.
The Series C Preferred will be nonredeemable, and subordinate to all other
series of MFS Preferred Stock. The liquidation preference of each share of
Series C Preferred is an amount equal to (a) 1,000 times the aggregate amount to
be distributed per share to holders of MFS Common Stock and (b) after the
payments set forth in (a), a ratable and proportionate share with the holders of
MFS Common Stock of the remaining assets to be distributed. Each share of
Series C Preferred will be entitled to receive, when, as and if declared, a
quarterly dividend at the rate equal to 1,000 times the aggregate per share
amount of all cash dividends and 1,000 the aggregate per share amount of all
non-cash dividends or other distributions (payable in kind) (other than a
dividends payable in of MFS equity securities). Each share of Series C
Preferred will have 1,000 votes, subject to adjustment, voting together with the
MFS Common Stock and not as a separate class. If MFS enters into any
consolidation, merger, combination or other transaction in which the shares of
MFS Common Stock are exchanged, each share of Series C Preferred will be
entitled to receive 1,000 times the amount received per share of MFS Common
Stock. The
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<PAGE>
rights of the Series C Preferred as to dividends, voting rights and
liquidation are protected by antidilution provisions.
MFS may redeem the MFS rights in whole, but not in part, at any time until
ten days following the date on which there has been public disclosure that, or
facts indicating that, a person has become an Acquiring Person at a price (the
"Redemption Right") of $.01 per MFS Right (or such other consideration deemed
appropriate by the MFS Board of Directors) by resolution of the MFS Board of
Directors, subject to certain exceptions. The redemption of the MFS Rights may
be made effective at such time on such basis with such conditions as the MFS
Board of Directors in its sole discretion may establish. The MFS Rights
terminate immediately upon the action of the MFS Board of Directors ordering
redemption of the MFS Rights and thereafter the holders of MFS Rights will only
be able to receive the Redemption Price.
Other than provisions relating to the principal economic terms of the MFS
Rights, the MFS Rights Agreement may be amended by resolution of MFS' Board of
Directors, subject to certain exceptions, prior to the Distribution Date. After
the Distribution Date, the MFS Rights Agreement may be amended by resolution of
the MFS' Board of Directors, subject to certain exceptions, in order to cure any
ambiguity, to make changes which do not adversely affect the interests of
holders of MFS Rights (excluding the interests of any Acquiring Person or its
affiliates or associates), or to shorten or lengthen any time period under the
MFS Rights Agreement; provided, however, that no amendment to adjust the time
period governing redemption may be made at such time as the MFS Rights are no
redeemable.
The MFS Rights have certain anti-takeover effects. The MFS Rights will
cause substantial dilution to a person or group that attempts to acquire, or
merge with, MFS without conditioning the offer on the MFS Rights being rendered
inapplicable.
COMPARISON OF STOCKHOLDER RIGHTS
The following is a summary of material differences between the rights of
holders of UUNET Common Stock and the rights of holders of MFS Common Stock.
Each of UUNET and MFS is organized under the laws of the State of Delaware.
Any material differences in the rights of their respective stockholders would
arise from various provisions of the Certificate of Incorporation and By-laws of
each of UUNET and MFS. Among the differences between the rights of the holders
of MFS Common Stock and UUNET Common Stock are the following: (i) the total
number of authorized shares of capital stock of MFS is 425,000,000 shares,
consisting of 400,000,000 shares of MFS Common Stock and 25,000,000 shares of
MFS Preferred Stock, while the total number of authorized shares of capital
stock of UUNET is 175,500,000 shares, consisting of 175,000,000 shares of UUNET
Common Stock and 500,000 shares of UUNET Preferred Stock; (ii) the Certificate
of Incorporation of MFS may be amended by majority vote of the board of
directors or the stockholders, while the Certificate of Incorporation of UUNET
requires the affirmative vote of the holders of at least 66 2/3% of the voting
power of all of the then outstanding capital stock of UUNET to amend the
Certificate of Incorporation regarding election of directors, special meetings
of stockholders, liability of directors, and indemnification; (iii) the
Certificate of Incorporation of MFS provides that special meetings of the
stockholders may be called only by the Board of Directors or the Chairman of the
Board of Directors, while the By-laws of UUNET provide that the Board of
Directors, the Chairman of the Board of Directors, the President or the Chief
Executive Officer, unless otherwise required by law, may call such meeting; (iv)
the By-laws of MFS provide that to propose business to be transacted at an
annual meeting, a stockholder's timely notice must be received by MFS not less
than 60 days nor more than 90 days prior to the anniversary of the immediately
preceding annual meeting of stockholders, while the By-laws of UUNET deem such
notice timely if received by UUNET not less than 120 calendar days in advance of
the date that UUNET's proxy statement was released to stockholders in connection
with the previous year's annual meeting of stockholders; the By-laws of UUNET
provide that directors may be removed only for cause and only by the affirmative
vote of the holders of at least a majority of the voting power of all of the
then outstanding shares of capital stock of UUNET entitled to vote generally in
the election of directors voting together as a single class and vacancies from
such action may be filled only by the affirmative vote of a majority of the
shares represented and voting at a duly held meeting at which a quorum is
present or by
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unanimous written consent of the stockholders, while the By-laws of MFS are
silent although under Delaware law, members of a classified board of directors
(which MFS has), can only be removed for cause; (v) the By-laws of MFS provide
that a stockholder's notice in connection with the nomination of directors is
timely if received by MFS (a) in the case of an annual meeting, not less than 60
days nor more than 90 days prior to the anniversary date of the immediately
preceding annual meeting of stockholders, and (b) in the case of a special
meeting of stockholders called for the purpose of electing directors, not later
than the close of business on the 10th day following the day on which notice of
the date of the special meeting was mailed or public disclosure of the date of
the special meeting was made, whichever first occurs, while the By-laws of UUNET
provide that such notice is timely if received by UUNET not less than 21 days
nor more than 60 days prior to any meeting of stockholders called for the
election of directors, but if less than 21 days' notice of the meeting is given
to stockholders, a stockholder's notice shall be considered timely if received
by UUNET at the close of business on the 7th day following the day on which the
notice of meeting was mailed; and (vi) the Certificate of Incorporation of MFS
provides that the By-laws of MFS may be amended or repealed by majority vote of
the board of directors or by the affirmative vote of 66 2/3% of the outstanding
stock of MFS entitled to vote thereon, while the By-laws of UUNET provide that
the affirmative vote of the holders of at least 66 2/3% of the voting power of
all of the then outstanding shares of the capital stock of UUNET entitled to
vote generally in the election of directors is required to amend or repeal By-
laws of UUNET that relate to special meetings of stockholders, number and term
of office of directors, vacancies and newly created directorships, removal of
directors, indemnification of directors and officers, and requirements for
amendments. Neither the Certificate of Incorporation nor the By-laws of either
MFS or UUNET contain any other provisions designed to delay or impede a change
of control or supermajority voting provisions.
MANAGEMENT OF UUNET
DIRECTORS
The following sets forth information as to the persons who are expected to
serve as directors of UUNET following the Merger:
James Q. Crowe, 47, has been the senior executive officer of MFS since its
inception. He has served as Chairman of the Board of MFS since 1988, Chief
Executive Officer since November 1991 and was President (January 1988-June 1989
and April 1990-January 1992). Mr. Crowe has also served as President and Vice
President of Kiewit Industrial Co., which is engaged in large industrial
construction projects, such as independent power projects, cogeneration
facilities, and, until 1988, telecommunications projects. Prior to joining
Peter Kiewit Sons', Inc. ("PKS") in 1986, Mr. Crowe was employed by Morrison-
Knudsen Corporation, a major construction and engineering company based in
Boise, Idaho, where he held the position of Group Vice President with
responsibility for the electric power market. Mr. Crowe is a Director of PKS,
Kiewit Diversified Group Inc. ("KDG"), a wholly owned subsidiary of PKS, RCN
Corporation, a wholly owned subsidiary of KDG ("RCN"), and CalEnergy
Company, Inc. ("CEC"), a geothermal energy producer, which is partially owned by
KDG. In addition, since October 1993, Mr. Crowe has been a Director of C-TEC
Corporation ("C-TEC"), a company controlled by RCN that, until MFS acquired
these operations from C-TEC on May 8, 1995, owned a competitive access provider
providing business services in Westchester County, New York. Mr. Crowe is
presently a member of the executive committee of the MFS Board of Directors (the
"Executive Committee").
R. Douglas Bradbury, 44, has been the Chief Financial Officer of MFS since
January 1992 and Executive Vice President since August 1995. Previously, Mr.
Bradbury was Senior Vice President of MFS from September 1992 to August 1995,
and prior to that, he was Senior Vice President - Corporate Affairs for MFS
Telecom. Before joining MFS in 1988, he was Executive Vice President and Chief
Operating Officer at American Pioneer Telephone, Inc., a regional long distance
carrier based in Orlando, Florida, and a Vice President of Manufacturers Hanover
Trust Company in New York City and Milan, Italy.
Kirby G. Pickle, 39, has been an Executive Vice President of MFS and
President and Chief Executive Officer of the MFS Intelenet Companies since
August 1995; previously, he was President and Chief Executive Officer of MFS
Intelenet from November 1992. From September 1992 to August 1995 he was a
Senior Vice
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President of MFS. Previously, he was Senior Vice President of Sales
and Marketing of MFS Telecom, and had general management responsibilities over
MFS Telecom's Northern Division, comprising six metropolitan area networks.
Prior to joining MFS Telecom in January 1991, he was Vice President of
Marketing/Business Development for Sprint Corporation, and has held other sales,
customer service and marketing positions with Sprint Corporation, MCI
Communications Corporation and AT&T.
Terrence J. Ferguson, 53, has been responsible for the legal affairs of MFS
since its inception. He was elected Senior Vice President in September 1992,
General Counsel in January 1992 and Secretary in November 1991. Before joining
MFS in October 1992, Mr. Ferguson was employed as an attorney by PKS. From
September 1976 to December 1981, Mr. Ferguson was an associate and then partner
in the law firm Kutak Rock.
Richard L. Adams, Jr., 39, founded the business of UUNET in 1987, has been
a director of UUNET since its inception in May 1990, and has served as the Chief
Technical Officer of UUNET since June 1994. In addition, Mr. Adams served as
President and Chief Executive Officer of UUNET from inception to June 1994. Mr.
Adams has been active in data communications and networking since 1980 and
designed standard networking protocols, including SLIP (Serial Line Internet
Protocol) and the "t" protocol for running UUCP over TCP/IP connections. Mr.
Adams is a founder and a director of the Commercial Internet Exchange
Association. Mr. Adams received his B.S. and M.S. degrees in Computer Science
from, and performed postgraduate research in Mechanical Computer Aided Design
at, Purdue University.
John W. Sidgmore, 44, has served as President, Chief Executive Officer and
a director of UUNET since June 1994. In 1989, he became President and Chief
Executive Officer of Intelicom Solutions Corporation (currently CSC Intelicom),
a telecommunications software company. In 1991, the company was sold to Computer
Sciences Corporation, and he remained President and Chief Executive Officer
until June 1994. From 1975 to 1989, Mr. Sidgmore was employed by GEIS, where he
was Vice President and General Manager of GEIS North America from 1985 to 1989.
Mr. Sidgmore is a director of Saville Systems PLC, a provider of billing
software for the telecommunications industry. Mr. Sidgmore received his B.A. in
Economics from State University of New York.
See "MFS RELECTION OF CLASS I DIRECTORS PROPOSAL--Information as to
Nominees for Elections as Class I Directors" and "--Executive Compensation" for
additional information with respect to Messrs. Crowe and Bradbury. See "--
Officers," "--Employment Arrangements" and "THE MERGER-- Interests of Certain
Persons in the Merger" for additional information with respect to Messrs. Adams
and Sidgmore.
OFFICERS
Set forth below are the names, ages as of March 31, 1996 and titles of
certain of the persons who are expected to serve as executive officers of UUNET
following the Merger:
Name Age Position
- ---- --- --------
John W. Sidgmore 44 President and Chief Executive Officer
Richard L. Adams, Jr. 39 Chief Technical Officer
David R. Boast 45 Vice President, Microsoft Network Division
Kevin R. Boyne 41 Vice President, Network Operations
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David F. Foster 49 Vice President, Business Development
Heidi B. Heiden 57 Senior Vice President, Network Operations and
Technology
Jeffrey G. Hilber 42 Vice President and Chief Financial Officer
Martina W. Knee 42 Vice President, General Counsel and Secretary
Diana E. Lawrence 44 Vice President, Human Resources
James T. McManus 37 Vice President, Systems Engineering
Michael D. O'Dell 42 Vice President and Chief Scientist
Jeffrey S. Osborn 37 Vice President, Network Sales and Marketing
Eric L. Scace 43 Vice President, International Development
Joseph Squarzini, Jr. 56 Senior Vice President, Global Technology
Integration
Alan B. Taffel 39 Vice President, Sales and Marketing
Mr. Sidgmore has served as President, Chief Executive Officer and a
director of UUNET since June 1994. In 1989, he became President and Chief
Executive Officer of Intelicom Solutions Corporation (currently CSC Intelicom),
a telecommunications software company. In 1991, the company was sold to Computer
Sciences Corporation, and he remained President and Chief Executive Officer
until June 1994. From 1975 to 1989, Mr. Sidgmore was employed by GEIS, where he
was Vice President and General Manager of GEIS North America from 1985 to 1989.
Mr. Sidgmore is a director of Saville Systems PLC, a provider of billing
software for the telecommunications industry. Mr. Sidgmore received his B.A. in
Economics from State University of New York.
Mr. Adams founded the business of UUNET in 1987, has been a director of
UUNET since its inception in May 1990, and has served as the Chief Technical
Officer of UUNET since June 1994. In addition, Mr. Adams served as President and
Chief Executive Officer of UUNET from inception to June 1994. Mr. Adams has been
active in data communications and networking since 1980 and designed standard
networking protocols, including SLIP (Serial Line Internet Protocol) and the "t"
protocol for running UUCP over TCP/IP connections. Mr. Adams is a founder and a
director of the Commercial Internet Exchange Association. Mr. Adams received his
B.S. and M.S. degrees in Computer Science from, and performed postgraduate
research in Mechanical Computer Aided Design at, Purdue University.
Mr. Boast has served as Vice President, Microsoft Network Division of UUNET
since December 1994, after serving as Director, Product Assurance from June 1994
to December 1994. From August 1981 to October 1993, he served in a variety of
positions at Legent Corporation, most recently as Corporate Vice President,
Client Services.
Mr. Boyne has served as Vice President, Network Operations of UUNET since
December 1995, after joining UUNET in March 1995, as Manager, Engineering and
serving in various engineering and operations capacities until December 1995.
From 1976 to February 1995, Mr. Boyne served in a variety of positions at GEIS
and General Electric Technical Services Co., another subsidiary of General
Electric Co., most recently serving as Manager, ECS (electronic commerce
services) Connectivity at GEIS. Mr. Boyne received his B.S. in Mathematics and
his M.S. in Computer and Information Science from The Ohio State University.
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Mr. Foster has served as Vice President, Business Development of UUNET
since November 1994. He was a principal of David Foster Associates, a consulting
firm, from January 1992 to November 1994 and was Vice President of Marketing for
Soft-Switch, Inc. from March 1990 to January 1992. Mr. Foster received his B.A.
in Mathematics from the University of Georgia.
Mr. Heiden has served as Senior Vice President, Network Operations and
Technology, since September 1995. Prior to joining UUNET, he was Senior
Operating Officer at Salomon Inc. from December 1990 to August 1995 and was
Senior Vice President of the Wollongong Group from July 1986 to November 1990.
He served in the United States Army from July 1963 to January 1984 where he led
diverse technology development programs including prototype user equipment for
the Global Positioning System. Mr. Heiden created and ran the DDN (Defense Data
Network), the largest data system at that time, which formed the basis of what
is now the Internet. Mr. Heiden received a B.S. from the United States Military
Academy, West Point, New York.
Mr. Hilber has served as Chief Financial Officer of UUNET since September
1993 and as a Vice President since January 1996. Prior to joining UUNET, Mr.
Hilber was Corporate Controller of Telebit Corporation from November 1991 to
August 1993. Prior to his association with Telebit, he held various positions
with Qume Corporation, including Corporate Controller, from September 1988 to
November 1991. From 1978 to 1988, he served in various positions with Arthur
Andersen LLP (then Arthur Andersen & Co.), most recently as Senior Audit
Manager. Mr. Hilber received his B.B.A. in Accounting from the University of
Wisconsin-Milwaukee and has held licenses as a certified public accountant in
the States of California and Wisconsin.
Ms. Knee has served as Vice President, General Counsel and Secretary of
UUNET since December 1995. From January 1990 through November 1995, she was a
shareholder of a partner of Heller Ehrman White & McAuliffe, having become
associated with the firm in 1983. Ms. Knee received her B.A. in Psychology from
the University of California, Berkeley and her J.D. from the Boalt Hall School
of Law, University of California, Berkeley.
Ms. Lawrence has served as Vice President, Human Resources of UUNET since
November 1994, after serving as Director, Human Resources from September to
November 1994. Prior to joining UUNET, she held various human resources
management positions with GEIS from January 1984 to September 1994. Ms. Lawrence
received her B.A. in English from Siena College.
Mr. McManus has served as Vice President, Systems Engineering of UUNET
since January 1996. Prior to joining UUNET, he was Vice President, Systems
Engineering at Salomon Inc. from June 1993 until December 1995. Mr. McManus
served as Vice President, Strategic Projects from May 1991 until 1993 and
Manager, Network Planning from October 1989 to May 1991, each at Salomon Inc. He
received his B.A. in Engineering and M.B.A. from Manhattan College.
Mr. O'Dell has served as Vice President and Chief Scientist of UUNET since
January 1996 and as Vice President, Research and Development from March 1993
through December 1995. Prior to joining UUNET, he was a Member of the Technical
Staff at Bell Communications Research (Bellcore) from April 1990 to March 1993.
Mr. O'Dell received his B.S. and M.S. degrees in Computer Science from the
University of Oklahoma.
Mr. Osborn has served as Vice President, Network Sales and Marketing since
January 1996 and as Vice President, Sales of UUNET from November 1994 to January
1996, and as Director of Sales and Marketing from November 1993 to November
1994. Prior to joining UUNET, he was Vice President of Sales at InterCon Systems
from May 1992 to November 1993 and was President of Wilder Systems ("Wilder"), a
startup software publishing company, from September 1991 to May 1992. Before
joining Wilder, Mr. Osborn was Director of Sales for Cayman Systems from August
1988 to September 1991. Mr. Osborn received his B.A. in Economics from Trinity
College.
Mr. Scace has served as Vice President, International Development since
July 1995 and as Manager, International Development from April 1995 to July
1995. Prior to joining UUNET, he was President of Klaros Corp., an independent
consulting firm, from September 1994 to April 1995. From June 1993 until
September
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1994, Mr. Scace served as Regional Sales Manager of Alcatel Data Networks, a
joint venture of Sprint Corporation and Alcatel N.V. ("Alcatel Data Networks").
He was the Regional Sales Manager for Sprint International from prior to 1990
until June 1993. Mr. Scace received his B.S. in Atmospheric Sciences from
Cornell University.
Mr. Squarzini has served as Senior Vice President, Global Technology
Integration since September 1995 and as Vice President, Network Operations of
UUNET from September 1993 to September 1995. Prior to joining UUNET, he served
as Vice President, Technology Operations of GEIS from 1983 to September 1993
where he was general manager of GEIS' international and teleprocessing
organization. From 1979 to 1983, Mr. Squarzini was General Manager, Telecoms and
Information Processing at General Electric Co., where he supervised the planning
and operation of the then largest private voice network. From 1976 to 1979, he
was Director of Systems Engineering at Satellite Business Systems, a partnership
of IBM, COMSAT and Aetna. Mr. Squarzini received his B.S. in Electrical
Engineering from Manhattan College in New York.
Mr. Taffel has served as Vice President, Sales and Marketing of UUNET since
January 1996 and as Vice President, Marketing since September 1994. Prior to
joining UUNET, he served as Vice President, Marketing of Alcatel Data Networks
from June 1993 to August 1994. Mr. Taffel served as Vice President, Market
Development for Sprint International from July 1988 to June 1993. He is the past
President of the Frame Relay Forum. Mr. Taffel received his B.S. in Information
and Computer Sciences from the University of California, Irvine.
EMPLOYMENT ARRANGEMENTS
In May 1994, UUNET entered into an employment agreement with Mr. Sidgmore.
Pursuant to the terms of the agreement, Mr. Sidgmore's base salary is $220,000
per year, plus a bonus targeted at $130,000 per year. Mr. Sidgmore received a
$200,000 signing bonus in 1994, a $150,000 bonus in July 1995 for the period
July 1, 1994 through June 30, 1995, and a bonus of $82,500 in February 1996 for
the period July 1 through December 31, 1995. If UUNET terminates Mr. Sidgmore's
employment without cause, he will receive severance payments totaling $300,000.
UUNET granted to Mr. Sidgmore options to purchase at $0.16 per share 1,244,100
shares of UUNET Common Stock pursuant to the employment agreement. UUNET has a
right to repurchase 888,642 of such shares at the exercise price, which right
lapses ratably over 60 months beginning on July 31, 1994. In addition, UUNET may
repurchase 355,458 shares if Mr. Sidgmore voluntarily terminates his employment
before June 27, 1996. In the event of a change in control of UUNET or an
involuntary termination other than for cause of Mr. Sidgmore's employment by
UUNET, UUNET's right of repurchase lapses with respect to 50 percent of any of
the 888,642 shares subject to a right of repurchase at the time. See "THE
MERGER-Interests of Certain Persons in the Merger."
SECURITY OWNERSHIP OF MFS
PRIOR TO THE MERGER
The following table sets forth as of May 1, 1996 certain information with
respect to the beneficial ownership of MFS Common Stock and Series B Preferred
by (i) each person known by MFS to own beneficially 5% or more of the
outstanding shares of MFS Common Stock and Series B Preferred, (ii) each
director of MFS, (iii) MFS' Chief Executive Officer and each of the four
remaining most highly compensated executive officers (collectively, the
"Executive Group") and (iv) all executive officers and directors of MFS as a
group. No person listed in the following table is the beneficial owner of any
shares of Series A Preferred.
<TABLE>
<CAPTION>
AMOUNT AND NATURE AMOUNT AND NATURE OF
NAME AND ADDRESS OF OF OWNERSHIP- OWNERSHIP-CONVERTIBLE
BENEFICIAL OWNER OF CLASS COMMON STOCK PERCENT PREFERRED STOCK PERCENT
- --------------------------- ----------------- ------- --------------------- -------
<S> <C> <C> <C> <C>
James Q. Crowe (1) 1,464,526 1.1% 87,389 *
11808 Miracle Hills Drive
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE AMOUNT AND NATURE OF
NAME AND ADDRESS OF OF OWNERSHIP- OWNERSHIP-CONVERTIBLE
BENEFICIAL OWNER OF CLASS COMMON STOCK PERCENT PREFERRED STOCK PERCENT
- --------------------------- ----------------- ------- --------------------- -------
<S> <C> <C> <C> <C>
Omaha, Nebraska 68154
R. Douglas Bradbury (2) 278,118 * 3,537 *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Howard Gimbel (3) 219,918 * -- *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
William L. Grewcock (4) 4,056,672 3.2 758,554 5.1%
1000 Kiewit Plaza
Omaha, Nebraska 68131
Royce J. Holland (5) 565,834 * 11,499 *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Richard R. Jaros (6) 355,760 * 67,522 *
1000 Kiewit Plaza
Omaha, Nebraska 68131
Robert E. Julian 1,119,820 * 222,809 1.5%
1000 Kiewit Plaza
Omaha, Nebraska 68131
David C. McCourt (7) 21,808 * 977 *
105 Carnegie Center
Princeton, New Jersey
08540
Ronald W. Roskens 9,784 * -- *
617 North 90 Street
Omaha, Nebraska 68144
Walter Scott, Jr. (8) 9,458,548 7.5% 1,778,669 11.8%
1000 Kiewit Plaza
Omaha, Nebraska 68131
Kenneth E. Stinson 140,606 * 23,725 *
1000 Kiewit Plaza
Omaha, Nebraska 68131
Michael B. Yanney (9) 9,146 * -- *
1004 Farnam Street, Suite
400
Omaha, Nebraska 68102
Ronald R. Beaumont (10) 179,000 * -- *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Kirby G. Pickle (11) 204,722 * -- *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
All directors and 19,874,506 15.8% 2,953,704 19.6%
executive officers as a
group (27 persons) (12)
</TABLE>
________________________
* LESS THAN 1% OF THE OUTSTANDING SHARES.
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<PAGE>
(1) Includes 997,220 shares of MFS Common Stock which may be acquired within 60
days of May 1, 1996 through the exercise of stock options, and 166 shares
of MFS Common Stock held in trusts for the benefit of Mr. Crowe's child and
stepchildren.
(2) Includes 258,910 shares of MFS Common Stock which may be acquired within 60
days of May 1, 1996 through the exercise of stock options.
(3) Includes 60,000 shares of MFS Common Stock which may be acquired within 60
days of May 1, 1996 through the exercise of stock options.
(4) Includes 34,826 shares of MFS Common Stock and 13,030 shares of Series B
Preferred held in the Bill and Berniece Grewcock Foundation and 208,957
shares of MFS Common Stock and 78,180 shares of Series B Preferred
held in the Grewcock Family Limited Partnership.
(5) Includes 504,366 shares of MFS Common Stock which may be acquired within 60
days of May 1, 1996 through the exercise of stock options.
(6) Includes 5,483 shares of MFS Common Stock and 1,303 shares of Series B
Preferred held in trusts for the benefit of Mr. Jaros' children.
(7) Includes 5,000 shares of MFS Common Stock held by Mr. McCourt's wife.
(8) Includes 34,772 shares of MFS Common Stock and 12,991.2 shares of Series
B Preferred held in the Suzanne Scott Irrevocable Trust.
(9) Includes 704 shares of MFS Common Stock held by Mr. Yanney's wife and 2,000
shares of MFS Common Stock held by America First Companies, L.L.C., 60% of
which is indirectly owned by Mr. Yanney and his wife.
(10) Includes 179,000 shares of MFS Common Stock which may be acquired within 60
days of May 1, 1996 through the exercise of stock options.
(11) Includes 204,722 shares of MFS Common Stock which may be acquired within 60
days of May 1, 1996 through the exercise of stock options.
(12) Includes 3,444,542 shares of MFS Common Stock which may be acquired within
60 days of May 1, 1996 through the exercise of stock options.
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<PAGE>
AFTER THE MERGER
The following table sets forth certain information as of the MFS Record
Date with respect to the anticipated beneficial ownership of MFS Common Stock
and Series B Preferred, after giving effect to the issuance of ______ shares of
MFS Common Stock in the Merger, by (i) each person known by MFS to own
beneficially 5% or more of the outstanding shares of MFS Common Stock and Series
B Preferred, (ii) each director of MFS, (iii) MFS' Chief Executive Officer and
each of the four remaining most highly compensated executive officers
(collectively, the "Executive Group") and (iv) all executive officers and
directors of MFS as a group. No person listed in the following table is the
beneficial owner of any shares of Series A Preferred.
<TABLE>
<CAPTION>
AMOUNT AND NATURE AMOUNT AND NATURE OF
NAME AND ADDRESS OF OF OWNERSHIP- OWNERSHIP-CONVERTIBLE
BENEFICIAL OWNER OF CLASS COMMON STOCK PERCENT PREFERRED STOCK PERCENT
- --------------------------- ----------------- ------- --------------------- -------
<S> <C> <C> <C> <C>
Richard L. Adams, Jr. (1) -- *
3060 Williams Drive
Fairfax, Virginia 22031
James Q. Crowe (2) 87,389 *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
R. Douglas Bradbury (3) 3,537 *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Howard Gimbel (4) -- *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
William L. Grewcock (5) 758,554 5.1%
1000 Kiewit Plaza
Omaha, Nebraska 68131
Royce J. Holland (6) 11,499 *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Richard R. Jaros (7) 67,522 *
1000 Kiewit Plaza
Omaha, Nebraska 68131
Robert E. Julian 222,809 1.8%
1000 Kiewit Plaza
Omaha, Nebraska 68131
David C. McCourt (8) 977 *
105 Carnegie Center
Princeton, New Jersey 08540
Ronald W. Roskens -- *
617 North 90 Street
Omaha, Nebraska 68144
Walter Scott, Jr. (9) 1,772,173 11.8%
1000 Kiewit Plaza
Omaha, Nebraska 68131
John W. Sidgmore (1) -- *
3060 Williams Drive
Fairfax, Virginia 22031
Kenneth E. Stinson 23,725 *
1000 Kiewit Plaza
Omaha, Nebraska 68131
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE AMOUNT AND NATURE OF
NAME AND ADDRESS OF OF OWNERSHIP- OWNERSHIP-CONVERTIBLE
BENEFICIAL OWNER OF CLASS COMMON STOCK PERCENT PREFERRED STOCK PERCENT
- --------------------------- ----------------- ------- --------------------- -------
<S> <C> <C> <C> <C>
Michael B. Yanney (10) -- *
1004 Farnam Street, Suite 400
Omaha, Nebraska 68102
Ronald R. Beaumont (11) -- *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Kirby G. Pickle (12) -- *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
All directors and 2,947,208 19.6%
executive officers as a
group (30 persons) (13)
</TABLE>
________________________
* Less than 1% of the outstanding shares.
(1) Such person will become a director of MFS upon consummation of the Merger.
see "THE MERGER-Interests of Certain Persons in the Merger," "MANAGEMENT OF
UUNET--Officers" and "--Employment Arrangements" for additional information
concerning such person's biographical information and terms of employment.
(2) Includes _______ shares of MFS Common Stock which may be acquired within 60
days of the MFS Record Date through the exercise of stock options, and 83
shares of MFS Common Stock held in trusts for the benefit of Mr. Crowe's
child and stepchildren.
(3) Includes _______ shares of MFS Common Stock which may be acquired within 60
days of the MFS Record Date through the exercise of stock options.
(4) Includes ______ shares of MFS Common Stock which may be acquired within 60
days of the MFS Record Date through the exercise of stock options.
(5) Includes 34,826 shares of MFS Common Stock and 13,030 shares of Series B
Preferred held in the Bill and Berniece Grewcock Foundation and 208,957
shares of MFS Common Stock and 78,180 shares of Series B Preferred held in
the Grewcock Family Limited Partnership.
(6) Includes _______ shares of MFS Common Stock which may be acquired within 60
days of the MFS Record Date through the exercise of stock options.
(7) Includes 5,483 shares of MFS Common Stock and 1,303 shares of Series B
Preferred held in trusts for the benefit of Mr. Jaros' children.
(8) Includes 5,000 shares of MFS Common Stock held by Mr. McCourt's wife.
(9) Includes 34,772 shares of MFS Common Stock and 12,991.2 shares of
Series B Preferred held in the Suzanne Scott Irrevocable Trust.
(10) Includes 704 shares of MFS Common Stock held by Mr. Yanney's wife and 2,000
shares of MFS Common Stock held by America First Companies, L.L.C., 60% of
which is indirectly owned by Mr. Yanney and his wife.
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<PAGE>
(11) Includes _______ shares of MFS Common Stock which may be acquired within 60
days of the MFS Record Date through the exercise of stock options.
(12) Includes _______ shares of MFS Common Stock which may be acquired within 60
days of the MFS Record Date through the exercise of stock options.
(13) Includes ______ shares of MFS Common Stock which may be acquired within 60
days of the MFS Record Date through the exercise of stock options.
SECURITY OWNERSHIP OF UUNET
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 31, 1996 by (i) each of UUNET's
directors, its Chief Executive Officer and each of the other four most highly
compensated executive officers of UUNET as of December 31, 1995 (ii) all
directors and executive officers of UUNET as a group and (iii) each person who
is known by UUNET to own beneficially more than five percent of the Common
Stock. The information included in this table is based upon information provided
to UUNET in writing by the stockholders named therein.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
------------------------
NUMBER (1) PERCENT (2)
----------- -----------
<S> <C> <C>
Richard L. Adams, Jr.(3)................ 4,704,872 14.61%
c/o UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, VA 22031
Microsoft Corporation................... 4,164,000 12.93
1 Microsoft Way
Redmond, WA 98052
Menlo Ventures IV, L.P.(4).............. 3,229,698 10.03
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025
New Enterprise Associates V, Limited 3,229,698 10.03
Partnership(5).........................
1119 St. Paul Street
Baltimore, MD 21202
Accel IV L.P.(6)........................ 3,210,320 9.97
One Palmer Square
Princeton, NJ 08542
Peter J. Barris(7)...................... 3,229,698 10.03
John W. Jarve(8)........................ 3,229,698 10.03
Arthur C. Patterson(9).................. 3,210,320 9.97
John W. Sidgmore(10).................... 1,147,602 3.56
Joseph Squarzini, Jr.(11)............... 282,841 *
Jeffrey G. Hilber(12)................... 270,321 *
Alan B. Taffel(13)...................... 102,696 *
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Les B. Strauss(14)...................... 92,432 *
Daniel C. Lynch(15)..................... 91,000 *
Daniel Rosen............................ 1,600 *
All directors and executive officers as
a group (21 persons)(16)............... 17,326,876 52.64%
</TABLE>
- ----------
* Less than one percent of the outstanding shares of UUNET Common Stock.
(1) Except pursuant to applicable community property laws or as indicated in the
footnotes to this table, to UUNET's knowledge, each stockholder identified
in the table possesses sole voting and investment power with respect to all
shares of UUNET Common Stock shown as beneficially owned by such
stockholder.
(2) Applicable percentage of ownership for each stockholder is based on
32,201,557 shares of UUNET Common Stock outstanding as of March 31, 1996
together with applicable options for such stockholders. Beneficial ownership
is determined in accordance with the rules of the Commission, and includes
voting and investment power with respect to the shares. Shares of UUNET
Common Stock subject to options are deemed outstanding for computing the
percentage of ownership of the person holding such options, but are not
deemed outstanding for computing the percentage ownership of any other
person.
(3) Includes 3,375 shares issuable upon exercise of options, all of which are
vested and 1,497 shares issuable upon the exercise of options which will
vest on December 31, 2002.
(4) Includes 2,563,031 shares held by Menlo Ventures IV, L.P. ("Menlo IV") and
666,667 shares held by Menlo Evergreen V, L.P. ("Menlo V"). John W. Jarve, a
director of UUNET, is a general partner of the general partner of each of
these partnerships, shares voting and dispositive power with respect to the
shares held by each such entity, and disclaims beneficial ownership of such
shares in which he has no pecuniary interest. See Note 8.
(5) Peter J. Barris, a director of UUNET, is a partner of the general partner of
New Enterprise Associates V, Limited Partnership ("NEA V"), shares voting
and dispositive powers with respect to the shares held by NEA V, and
disclaims beneficial ownership of such shares in which he has no pecuniary
interest. See Note 7.
(6) Includes 2,958,403 shares held by Accel Investors IV L.P. ("Accel IV"),
119,499 shares held by Accel Investors '93 L.P. ("Accel Investors"), 71,054
shares held by Ellmore C. Patterson Partners ("ECP Partners") and 61,364
shares held by Accel Keiretsu L.P. ("Keiretsu"). Arthur C. Patterson, a
director of UUNET, is a general partner of the general partner of each of
these partnerships, shares voting and dispositive power with respect to the
shares held by each such entity, and disclaims beneficial ownership of such
shares in which he has no pecuniary interest. See Note 9.
(7) All shares are held by NEA V. Mr. Barris is a partner of the general partner
of NEA V and disclaims ownership of such shares in which he has no pecuniary
interest. See Note 5.
(8) Includes 2,563,031 shares held by Menlo IV and 666,667 shares held by Menlo
V. Mr. Jarve is a general partner of the general partner of these
partnerships and disclaims ownership of such shares in which he has no
pecuniary interest. See Note 4.
(9) Includes 2,958,403 shares held by Accel IV, 119,499 shares held by Accel
Investors, 71,054 shares held by ECP Partners and 61,364 shares held by
Keiretsu. Mr. Patterson is a general partner of the general partner of each
of these partnerships and disclaims ownership of such shares in which he has
no pecuniary interest. See Note 6.
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<PAGE>
(10) Includes as of 60 days after March 31, 1996, 918,264 shares subject to a
right of repurchase by UUNET which expires as to 14,811 of such shares
ratably on a monthly basis through June 30, 1999 and as to 355,458 of such
shares on June 27, 1996 and 46,672 shares held in a trust of which Mr.
Sidgmore is the trustor and the sole trustee. Also includes 5,500 shares
issuable upon exercise of options, all of which will be vested within 60
days of March 31, 1996 and 3,975 shares issuable upon exercise of options
which will vest on December 31, 2002.
(11) Includes as of 60 days after March 31, 1996, 134,167 shares subject to a
right of repurchase by UUNET which expires ratably on a monthly basis
through September 13, 1998, 7,917 shares issuable upon exercise of options,
which vest ratably on a monthly basis through July 20, 1999, 9,125 shares
issuable upon exercise of options, all of which will be vested within 60
days of March 31, 1996 and 1,466 shares issuable upon exercise of option
which will vest on December 31, 2002.
(12) Includes as of 60 days after March 31, 1996, 134,167 shares subject to a
right of repurchase by UUNET which expire ratably on a monthly basis
through September 1, 1998, 3,375 shares issuable upon exercise of options,
all of which will be vested within 60 days of March 31, 1996, and 1,446
shares issuable upon exercise of option which will vest on December 31,
2002.
(13) Includes as of 60 days after March 31, 1996, 66,667 shares subject to a
right of repurchase by UUNET which expires ratably on a monthly basis
through September 26, 1999, 3,250 shares issuable upon exercise of options,
all of which will be vested within 60 days of March 31, 1996, and 1446
shares issuable upon exercise of options which will vest on December 31,
2002.
(14) Includes 38,960 shares issuable upon exercise of options, 24,376 of which
will be vested within 60 days of March 31, 1996.
(15) Includes 56,500 shares issuable upon exercise of options, 30,375 of which
will be vested within 60 days of March 31, 1996.
(16) Includes 9,669,716 shares held by entities affiliated with certain
directors as described in Notes 7 through 9 and 718,873 shares issuable
pursuant to the exercise of outstanding options.
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<PAGE>
MFS REELECTION OF CLASS I DIRECTORS PROPOSAL
The Board currently consists of twelve directors, divided into three
------------------
classes, designated Class I, Class II and Class III. Each class currently
- --------------------------------------------------------------------------
consists of four Directors. All of the Class I directors are standing for
- --------------------------
reelection. At the MFS Annual Meeting such Class I Directors will be elected to
hold office for a three-year term until the 1999 annual meeting, or until their
successors have been elected and qualified. If any nominee shall, prior to the
MFS Annual Meeting, become unavailable for election as a Director, the persons
named in the accompanying form of proxy will vote for such nominee, if any in
their discretion as may be recommended by the MFS Board of Directors, or the MFS
Board of Directors may reduce the number of Directors to eliminate the vacancy.
INFORMATION AS TO NOMINEES FOR ELECTION AS CLASS I DIRECTORS
The respective ages, positions with MFS, business experience, directorships
in other companies and Board committee memberships of the nominees for election
are set forth below.
James Q. Crowe, 45, has been the senior executive officer of MFS since its
inception. He has served as Chairman of the Board of MFS since 1988, Chief
Executive Officer since November 1991 and was President (January 1988-June 1989
and April 1990-January 1992). Mr. Crowe has also served as President and Vice
President of Kiewit Industrial Co., which is engaged in large industrial
construction projects, such as independent power projects, cogeneration
facilities, and, until 1988, telecommunications projects. Prior to joining
Peter Kiewit Sons', Inc. ("PKS") in 1986, Mr. Crowe was employed by Morrison-
Knudsen Corporation, a major construction and engineering company based in
Boise, Idaho, where he held the position of Group Vice President with
responsibility for the electric power market. Mr. Crowe is a Director of PKS,
Kiewit Diversified Group Inc. ("KDG"), a wholly owned subsidiary of PKS, RCN
Corporation, a wholly owned subsidiary of KDG ("RCN"), and CEC, a geothermal
energy producer, which is partially owned by KDG. In addition, since October
1993, Mr. Crowe has been a Director of C-TEC Corporation ("C-TEC"), a company
controlled by RCN that, until MFS acquired these operations from C-TEC on May 8,
1995, owned a competitive access provider providing business services in
Westchester County, New York. Mr. Crowe is presently a member of the executive
committee of the MFS Board of Directors (the "Executive Committee").
Royce J. Holland, 46, has been a Director and the President and Chief
Operating Officer of since January 1992. He has been the Chairman of MFS
Intelenet, Inc. ("MFS Intelenet") since November 1992. He was the President and
Chief Executive Officer of MFS Telecom, Inc. ("MFS Telecom") between April 1990
and November 1992. He was previously the President (June 1989-April 1990) and
Vice President (February 1988-May 1989) of MFS. Before joining MFS, Mr. Holland
held various management positions with Energy Factors, Inc., an independent
power company based in San Diego, California and Morrison-Knudsen Corporation.
Mr. Holland is a Director of KDG. Mr. Holland is presently a member of the
Executive Committee.
R. Douglas Bradbury, 44, has been the Chief Financial Officer of MFS since
January 1992 and Executive Vice President since August 1995. Previously, Mr.
Bradbury was Senior Vice President of MFS from September 1992 to August 1995,
and prior to that, he was Senior Vice President - Corporate Affairs for MFS
Telecom. Before joining MFS in 1988, he was Executive Vice President and Chief
Operating Officer at American Pioneer Telephone, Inc., a regional long distance
carrier based in Orlando, Florida, and a Vice President of Manufacturers Hanover
Trust Company in New York City and Milan, Italy.
William L. Grewcock, 69, has been the Vice Chairman of PKS and a member of
the Board of Directors of PKS for more than the last five years.
THE MFS BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES NAMED ABOVE.
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<PAGE>
BOARD OF DIRECTORS' MEETINGS
The Board met seven times during 1995, the Audit Committee met four times
and the Compensation Committee met six times. Each of the MFS' Directors
attended at least 75% of (1) the number of meetings of the Board and (2) the
total number of meetings held by all committees of the Board on which he served.
EXECUTIVE COMMITTEE
The Executive Committee exercises, to the maximum extent permitted by law,
all powers of the Board between board meetings, except those functions assigned
to specific committees.
AUDIT COMMITTEE
The Audit Committee reviews the services provided by MFS' independent
auditors, consults with the independent auditors and reviews the need for
internal auditing procedures and the adequacy of internal controls.
COMPENSATION COMMITTEE
The Compensation Committee determines the compensation of the Chief
Executive Officer and reviews the compensation and stock option awards of all
other executives.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Gimbel has a consulting agreement with a subsidiary of MFS pursuant to
which he performs real estate and building access services in return for a
monthly fee of $5,000, an automobile allowance, health insurance coverage and
reimbursement of expenses. This consulting agreement can be terminated by
either party upon thirty days' notice. Messrs. Jaros, McCourt, Roskens and
Yanney have not been employees of MFS or otherwise participated in activities
constituting compensation committee interlocks or insider participation
requiring disclosure under this caption.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Under the securities laws of the United States, MFS' Directors, its
executive officers, and any persons holding more than ten percent of the MFS
Capital Stock are required to report their initial ownership of the MFS Capital
Stock and any subsequent changes in that ownership to the Securities and
Exchange Commission. Specific due dates for these reports have been established
and MFS is required to disclose in this proxy statement any failure to file by
these dates during 1995. All of these filing requirements were satisfied. In
making these disclosures, MFS has relied solely on written representations of
its Directors and executive officers and copies of the reports that they have
filed with the Securities and Exchange Commission.
COMPENSATION COMMITTEE REPORT
The Compensation Committee (the "Committee") is responsible for determining
the cash and equity compensation of James Q. Crowe, Chairman of the Board and
Chief Executive Officer. The Committee reviews and approves the cash
compensation of certain of MFS' other senior executives based upon the
recommendations of Mr. Crowe.
MFS believes that the compensation levels of its executive officers, who
provide leadership and strategic direction, should consist of: (i) fair base
salaries, (ii) significant cash bonus opportunities based on achievement of
objectives established by MFS and (iii) ownership of MFS Common Stock and stock
options to join management's interests with stockholders' interests, targeted to
provide opportunities that are comparable to other similarly situated
telecommunications and high growth technology companies.
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<PAGE>
MFS considers the following factors (ranked in order of importance) when
determining compensation of executive officers: (i) MFS' performance measured
by attainment of specific objectives, (ii) the individual performance of each
executive officer, (iii) MFS' stock price performance, (iv) comparative industry
compensation levels and (v) historical cash and compensation levels. The
comparable industry compensation data is based in part on public
telecommunications companies that are included in the NASDAQ Telecommunications
Stock Index, which was chosen as the peer group for the Stockholder Return
Performance Graph and on the other publicly traded telecommunications and high
growth technology companies with comparable market capitalization. In the
future, the Committee also intends to review MFS' performance against the
Standard & Poor's 500 Index.
Determination of the Chief Executive Officers Compensation
For fiscal 1995, the MFS performance objectives were:
Continue to expand MFS' existing metropolitan area networks and develop new
networks in other metropolitan areas throughout the United States.
Accelerate the development of new networks internationally, primarily in
Western Europe.
Attract and retain experienced personnel to enable MFS to meet its tactical
and strategic goals.
Continue the acquisition of sufficient capital at an acceptable cost in
order to fund the MFS' business development plan.
Significantly increase MFS' revenues from its telecommunications segment
while ensuring that the cost of such service remained competitive.
Continue to shape and influence regulatory legislation on a state by state
and national level to enhance the MFS competitive posture.
These goals were met in fiscal 1995. Fiber miles increased 85%, the number
of buildings connected increased 108% and circuits in service increased 73%. As
of March 1996, MFS provides services on its networks, or through the resale of
services, or has network operations under development in 50 major metropolitan
areas in the United States and Europe. In 1995, MFS expanded its network
infrastructure into Western Europe (Frankfurt, Paris and Stockholm) to serve
existing large business customers and to take advantage of the new competitive
environment there. MFS also played an instrumental role in getting more than
half the states to pass legislation and continued to influence federal
legislation leading up to eventual passage of The Telecommunications Act of
1996.
During 1995, revenues from the telecommunications segment grew from $228.7
million to $498.2 million while costs associated with the provision of service
was within budget. At year-end 1995, MFS had 3,525 full-time employees compared
to 2,971 at year-end 1994.
In the second quarter, MFS received approximately $320 million in gross
proceeds from the sale of mandatorily convertible preferred stock, referred to
as DECS, with a 22% conversion premium to the issue price.
Based on the achievement of these goals and for aggressively pursuing the
implementation of MFS' expansion plan, Mr. Crowe received a 10% increase in base
salary in fiscal 1995 and a cash bonus paid in December of 1995 of $700,000 for
his performance in fiscal 1995.
EQUITY COMPENSATION
The Committee approves all awards made under the MFS 1992 Stock Plan and
the MFS 1993 Stock Plan. Periodically the Committee approves grants to existing
employees and also approves awards to new employees as an incentive to join MFS.
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<PAGE>
The Compensation Committee:
Howard Gimbel
Richard R. Jaros
David C. McCourt
Ronald W. Roskens
Michael B. Yanney-Chairman
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<PAGE>
Executive Compensation
Summary Compensation Table. The following table shows compensation paid
to, deferred or accrued for the benefit of, Mr. Crowe and each of the four other
most highly compensated executive officers (the "Executive Group") for all
services rendered to MFS during the fiscal years ended December 31, 1995, 1994
and 1993:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- -----------------------
OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS-OPTIONS (#) COMPENSATION (5)
- --------------------------- ---- ---------- ---------- ------------ --------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
James Q. Crowe............. 1995 $416,688 $700,000 $ -- -- $ 176,414
Chief Executive Officer 1994 373,146 500,000 -- --
1993 324,115 250,000 -- --
Royce J. Holland........... 1995 290,259 350,000 -- -- 96,631
Chief Operating Officer 1994 257,039 200,000 -- --
1993 216,538 150,000 -- --
Ronald R. Beaumont......... 1995 246,075 150,000 -- -- 15,061
Senior Vice President 1994 211,523 107,000 7,138(1)
1993 198,269 95,000 387,521(2) --
Kirby G. Pickle............ 1995 246,556 150,000 -- -- 56,396
Senior Vice President 1994 211,523 107,000 67,267(3) --
1993 198,269 95,000 68,817(4) 10,000
R. Douglas Bradbury........ 1995 230,340 200,000 -- -- 62,085
Chief Financial Officer 1994 192,923 120,000 -- --
1993 158,659 100,000 -- --
- ---------------------
</TABLE>
(1) Represents amounts received by Mr. Beaumont in connection with (i)
the reimbursement of moving expenses of $3,997 and (ii) the payment of
taxes on such moving expenses of $3,141.
(2) Represents amounts received by Mr. Beaumont in connection with (i)
the reimbursement of moving expenses of $101,216, (ii) the loss on the
sale of Mr. Beaumont's home of $107,000 and (iii) the reimbursement
of the payment of taxes on such amounts of $179,305.
(3) Represents amounts received by Mr. Pickle in connection with (i) the
payment of a cost of living adjustment of $42,000, (ii) the reimbursement
of moving expenses of $14,976 and (iii) the reimbursement of the
payment of taxes on such amounts of $10,291.
(4) Represents amounts received by Mr. Pickle in connection with (i) the
payment of a cost of living adjustment of $49,000, (ii) the reimbursement
of moving expenses of $54,583 and (iii) the reimbursement of the payment
of taxes on such amounts of $65,234.
(5) The amounts in this column represent (i) amounts of salary and bonus
forgone by members of the Executive Group pursuant to the ShareWorks Match
Plan (see "Approval of the 1995 Deferred Stock Purchase Plan Proposal"),
(ii) MFS matching contributions to the ShareWorks Match Plan on behalf of
members of the Executive Group, and (iii) year-end contributions to the
accounts of the members of the Executive Group pursuant to the ShareWorks
grant plan. These amounts are held in accounts for members of the Executive
Group as shares or units of MFS Common Stock. These amounts represent the
year-end value of such accounts based on the last reported sale price of
the MFS Common Stock on December 31, 1995.
No member of the Executive Group received any restricted stock awards,
stock options, stock appreciation rights ("SARs") or long-term incentive
performance ("LTIP") payouts for the fiscal year ended December 31, 1995.
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<PAGE>
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT FY-END
SHARES OPTIONS/SARS AT FY-END (#) ($)(1)
ACQUIRED ON VALUE REALIZED ------------------------------ -------------------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ------------ -------------- -------------- -------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
James Q. Crowe --- --- 997,220 664,810 $20,542,732 $13,695,086
Royce J. Holland --- --- 504,366 336,242 10,389,940 6,926,585
R. Douglas Bradbury --- --- 259,210 172,802 5,339,726 3,559,721
Ronald R. Beaumont --- --- 179,000 136,000 3,687,400 2,801,600
Kirby G. Pickle --- --- 204,722 143,146 4,135,473 2,826,108
</TABLE>
______________
(1) On December 31, 1995 as adjusted for the MFS 2-for-1 stock split effected
April 16, 1996, the last reported sale price for the MFS Common Stock as
reported by Nasdaq was $26.625 per share.
DIRECTORS' COMPENSATION
Directors of MFS who are employees or consultants of MFS and its affiliates
receive no directors' fees. Non-employee directors are paid an annual
directors' fee of $40,000, which is paid in MFS Common Stock on the date of the
annual meeting of stockholders based upon the average fair market value of the
MFS Common Stock during the 10 trading days prior to such date, plus $1,000 per
Board of Directors meeting and $1,000 per meetings of committees of the Board of
Directors. Committee Chairmen receive an annual retainer of $2,500 per year.
In addition, all Directors are reimbursed for their reasonable travel expenses
incurred in attending these meetings.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. McCourt is a director and president of, and owns, directly or
indirectly, approximately 17.5% of the voting stock of Metropolitan Fiber
Systems/McCourt, Inc. ("MFS/McCourt"). In 1995, the amount owed by MFS/McCourt
to MFS Telecom, Inc., either in the form of preferential payments or shares of
preferred stock held by MFS Telecom, Inc. or indebtedness by MFS Telecom, Inc.,
increased to $51.1 million from $44.9 million in 1994.
On May 5, 1995, MFS purchased Northeast Networks, Inc. a competitive access
provider providing service to Westchester County, New York from C-TEC, of which
Mr. McCourt is the Chairman and Chief Executive Officer, for a purchase price
of $6.2 million. An affiliate of MFS, Metropolitan Fiber Systems of New
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<PAGE>
Jersey, Inc. has a 66-2/3% interest in MFS/C-TEC, a New Jersey limited
partnership. The remaining 33-1/3% interest is held by an affiliate of C-TEC. As
of December 31, 1995, MFS had an outstanding cash advance to MFS/C-TEC of
$289,545.
Mr. Andrew Lipman, Senior Vice President of MFS, is a partner in the law
firm of Swidler & Berlin, Chartered, of Washington, D.C. The firm provides
legal services to MFS and was paid fees of approximately $2.9 million, $2.9
million and $6.1 million in 1993, 1994 and 1995, respectively. Mr. Lipman has
an arrangement with MFS under which he is expected to devote a substantial
portion of his time to legal/regulatory matters of MFS.
The PKS Executive Compensation Committee established a bonus pool to be
distributed among the senior management team of MFS and KDG in recognition of
their extraordinary achievements in creating value for PKS stockholders over a
significant period ending with the distribution of MFS Common Stock to certain
PKS stockholders on September 30, 1995. Mr. James Q. Crowe was paid $12 million,
Mr. Royce J. Holland was paid $3 million and Mr. R. Douglas Bradbury was paid $1
million from this bonus pool.
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<PAGE>
PERFORMANCE GRAPH
The following performance graph shall not be deemed to be incorporated by
reference by reason of any general statement incorporating by reference this
Joint Proxy Statement-Prospectus into any filing under the Securities Act of
1933, as amended (the "Securities Act") or the Exchange Act of 1934, as amended,
except to the extent that MFS specifically incorporates such information by
reference, and shall not otherwise be deemed filed under such Acts.
The following graph compares the cumulative annual return of MFS Common
Stock during the fiscal year ended December 31, 1995, with the cumulative total
stockholder return of (1) the Nasdaq Stock Market Index, (2) the Nasdaq
Telecommunications Stock Index and (3) the Standard & Poors 500 Stock Index.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
MFS COMMUNICATIONS COMPANY, INC., THE NASDAQ STOCK MARKET (US) INDEX,
THE NASDAQ TELECOMMUNICATIONS STOCK INDEX
AND THE STANDARD & POOR'S 500 STOCK INDEX
[GRAPH APPEARS HERE]
MFS' initial public offering was declared effective on May 19, 1993 and,
therefore, data is included for only a portion of that year.
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<PAGE>
MFS AMENDMENT TO AMENDED AND RESTATED 1993 STOCK PLAN PROPOSAL
Effective August 31, 1993, the MFS Board adopted the MFS Communications
Company, Inc. 1993 Stock Plan and on July 24, 1995 the Executive Committee
adopted an amendment and restatement of the 1993 Stock Plan, which was
subsequently approved by the stockholders (the "MFS 1993 Stock Plan"). On
September 19, 1995, December 15, 1995 and February 21, 1996 the Executive
Committee adopted further amendments to and restated the MFS 1993 Stock Plan,
subject to stockholder approval (the MFS 1993 Stock Plan, as amended and
restated, being referred to herein as the "Amended Plan"). The Amended Plan is
being submitted to stockholders in view of, among other things, the proposed
increase in the number of shares of MFS Common Stock authorized for issuance
(see the section below entitled "Shares Available for Grant") and MFS' desire
that Outperformance Options (as modified in the Amended Plan) continue to
qualify as "performance based compensation" for purposes of Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code") (see the section
below entitled "Outperformance Options"). If the Amended Plan is not approved by
the stockholders, the MFS 1993 Stock Plan as in effect immediately prior to such
amendments and restatement shall remain in full force and effect. Awards granted
prior to the effective date of the Amended Plan will remain outstanding subject
to the terms and conditions of the MFS 1993 Stock Plan.
The following summary of the MFS 1993 Stock Plan and the Amended Plan is
qualified in its entirety by reference to the text of the Amended Plan, a copy
of which has been filed with the Securities and Exchange Commission.
SUMMARY OF THE MFS 1993 STOCK PLAN
Purpose and Eligibility
The primary purpose of the MFS 1993 Stock Plan is to enable employees,
directors who are not also employees ("Non-Employee Directors") and outside
consultants to share in the growth and prosperity of MFS by encouraging stock
ownership by such persons and to attract and retain skilled personnel and
consultants. The MFS 1993 Stock Plan contemplates the issuance of incentive
stock options within the meaning of Section 422 of the Code, as well as non-
statutory stock options, Outperformance Options, restricted stock, stock
appreciation rights, cash and other stock-related awards ("Awards"). The MFS
1993 Stock Plan also provides that the shares of MFS Common Stock authorized for
issuance under the MFS 1993 Stock Plan will be available to satisfy MFS'
obligations to deliver shares of MFS Common Stock under other compensation and
benefit plans heretofore or hereafter established by MFS, including but not
limited to the 1996 Bonus Plan, the Deferred Stock Plan and the Qualified Stock
Plan (each as defined in the Amended Plan). All employees and outside
consultants of MFS and any of its subsidiaries ("Participants") are eligible for
discretionary Awards under the MFS 1993 Stock Plan. In addition, Non-Employee
Directors receive automatic grants of MFS Common Stock pursuant to a formula set
forth in the Plan. The approximate number of persons eligible to participate is
3,600. As of the date of this Joint Proxy Statement-Prospectus, of the
20,000,000 shares of MFS Common Stock initially authorized for issuance under
the MFS 1993 Stock Plan, approximately 9,500,000 shares remain available for
issuance under the MFS 1993 Stock Plan and approximately 10,500,000 shares
remain subject to outstanding Awards under the MFS 1993 Stock Plan.
Administration
The MFS 1993 Stock Plan is administered by the Compensation Committee.
Except for the automatic formula Awards to Non-Employee Directors, the
Compensation Committee, in its sole discretion, has the authority, among other
things, to determine the terms of all Awards granted under the MFS 1993 Stock
Plan, including any purchase or exercise price for an Award; to determine the
employees and outside consultants to whom, and the time or times at which,
Awards will be granted, exercised and become forfeitable; to determine the
number of shares covered by an Award; to interpret the MFS 1993 Stock Plan; and
to make all other determinations deemed advisable for the administration of the
MFS 1993 Stock Plan.
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<PAGE>
Options
The Compensation Committee may from time to time grant incentive stock
options ("Incentive Options") and non-statutory options ("Non-Statutory
Options") (collectively "Options") to any Participant. The terms of Options
granted under the MFS 1993 Stock Plan will be set out in Option agreements
between MFS and Participants which will contain such provisions as the
Compensation Committee from time to time deems appropriate, including the
exercise price and expiration date of such Options. Option agreements will
specify whether or not an Option is an Incentive Option.
In no event will the exercise price of an Incentive Option be less than
100% of the fair market value of the shares subject to the Option on the date of
grant. The term of Incentive Options cannot exceed ten years from the date of
grant and, generally, cannot extend beyond the optionee's employment with MFS.
The aggregate fair market value, determined as of the time the Incentive Option
is granted, of the MFS Common Stock which may become exercisable for the first
time by any employee during any calendar year cannot exceed $100,000. No
Incentive Option will be granted to an employee, who, at the time of grant, owns
stock representing more than 10% of the total combined voting power of all
classes of stock of MFS unless the exercise price of the Incentive Option is at
least 110% of the fair market value, at the time of grant, of the MFS Common
Stock subject to the Option, and the Option by its terms is not exercisable more
than five years from the date of grant.
The Compensation Committee may also grant new Options ("New Conditional
Options") to an optionee under the MFS 1993 Stock Plan who is also a holder of
one or more unexercised outstanding Options previously granted under the MFS
1993 Stock Plan or any other stock option plan of MFS on the condition that such
optionee shall surrender for cancellation one or more outstanding options which
represent the right to purchase a number of shares, in relation to the number of
shares to be covered by the New Conditional Option. The Compensation Committee
also may grant Options from time to time in substitution for similar rights held
by employees of other corporations who are about to become employees of MFS or a
subsidiary of MFS as a result of a merger or consolidation of the employing
corporation with MFS or its subsidiary or the acquisition by MFS or its
subsidiary of the assets or stock of the employing corporation as a result of
which it becomes a subsidiary of MFS.
Outperformance Options
The MFS 1993 Stock Plan provides that the Compensation Committee will be
authorized to grant Outperformance Options to any Participant. Outperformance
Options will have an initial exercise price equal to the per share fair market
value of MFS Common Stock on the date of grant, at which price an optionee may
purchase a designated number of shares of MFS Common Stock. Immediately prior to
the time of any exercise, the initial exercise price with respect to the shares
being exercised will adjust automatically (the "Adjusted Price"), upward or
downward, by a percentage equal to the annualized percentage increase or
decrease in the Standard & Poor's 500 Index (the "S&P") over the period
beginning on the date of grant and ending on the last day of the month
coincident with or immediately preceding the date of exercise (calculated
pursuant to the terms of the MFS 1993 Stock Plan) (the "S&P Period").
Outperformance Options will generally become exercisable ratably over the three
years following the date of grant; provided, that unless otherwise determined by
the Compensation Committee, such options will not be exercisable (i) within the
fifteen-day period preceding a Change in Control (as defined in the MFS 1993
Stock Plan) and (ii) at any time unless (1) the fair market value of a share of
MFS Common Stock has increased from the time of grant until the time of
purported exercise, and (2) the annualized percentage increase in the MFS Common
Stock is greater than the annualized percentage increase in the S&P as of the
last day of the month coincident with or immediately preceding the date of
purported exercise (each calculated pursuant to the terms of the MFS 1993 Stock
Plan). Depending on the extent to which such MFS Common Stock "outperforms the
S&P", the initial number of shares of MFS Common Stock covered by the portion of
the option being exercised shall be increased (the "Adjusted Shares") by a pre-
established factor (the "Factor"), which Factor will in no event be greater than
eight (8) (which maximum occurs only in the event that the annualized percentage
increase in MFS Common Stock exceeds the annualized percentage increase in the
S&P over a period (the "MFS Period") by ten or more percentage points). The
Factor will be determined on the date of exercise. The MFS Period will reflect a
period of time beginning on the date of grant and ending on the last day of the
month coincident with or immediately preceding the date of exercise. Each
Outperformance Option will contain a tandem right to a number of units
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("Units") equal to the number of Adjusted Shares, which entitle the holder, only
in the event of a Change in Control and the cancellation of the tandem
Outperformance Option, to an amount of cash determined as described below. See
"Change in Control." The term of an Outperformance Option will be ten years or
less. Upon the exercise of all or any portion of any Outperformance Option, the
Compensation Committee will be entitled to, with respect to such exercised
option or applicable portion, either (i) cause MFS to deliver to the optionee a
number of shares of MFS Common Stock with a value equal to the fair market value
of a share of MFS Common Stock, less the Adjusted Price, multiplied by the
number of Adjusted Shares so exercised; (ii) cause MFS to deliver to the
optionee, upon receipt of the Adjusted Price, a number of shares of MFS Common
Stock equal to the Adjusted Shares so exercised; or (iii) provide any other
economically equivalent benefit to the optionee.
The total number of shares of MFS Common Stock subject to Outperformance
Options which may be granted to any one individual over the term of the Amended
Plan shall not exceed in the aggregate 1,000,000, provided, that such number
shall be determined prior to application of the Factor described above.
Outperformance Options will be subject to the same restrictions on
transferability applying to Options.
Outperformance Options are intended to constitute "performance based"
compensation to certain employees of MFS and its subsidiaries (within the
meaning of Section 162(m) of the Code). Section 162(m) of the Code denies a
deduction by an employer for certain compensation in excess of $1 million per
year paid by a publicly traded corporation to the chief executive officer and
the four most highly compensated executive officers other than the chief
executive officer. Certain compensation, including "performance based"
compensation, is excluded from this deduction limit. Among the requirements for
compensation to qualify for this exception is that the material terms pursuant
to which the compensation is to be paid, including the performance goals, be
disclosed to and approved by the stockholders prior to the payment.
Restricted Stock
The Compensation Committee from time to time may grant restricted stock
("Restricted Stock") to any Participant. Each Participant who is awarded
Restricted Stock will be required to enter into an agreement with MFS, in a form
specified by the Compensation Committee, agreeing to the terms and conditions of
the grant and such other matters consistent with the MFS 1993 Stock Plan as the
Compensation Committee determines appropriate.
The Participant will have the entire beneficial ownership and all rights
and privileges of a stockholder with respect to the Restricted Stock awarded to
him, including the right to receive dividends and vote such Restricted Stock.
The Compensation Committee may provide any other terms and conditions with
regard to the Restricted Stock that it deems appropriate.
Stock Appreciation Rights
The Compensation Committee from time to time may grant stock appreciation
rights ("Stock Appreciation Rights") to any Participant. A Stock Appreciation
Right will be evidenced by an agreement between MFS and the Participant
containing such terms and conditions, consistent with the MFS 1993 Stock Plan,
as the Compensation Committee deems appropriate.
Upon exercise, a Stock Appreciation Right may be satisfied by MFS in cash
or shares of MFS Common Stock, as determined by the Compensation Committee. The
agreement may limit the maximum amount of appreciation taken into account under
a Stock Appreciation Right.
A Stock Appreciation Right may be granted in conjunction with an Option,
Restricted Stock or any other award granted under the MFS 1993 Stock Plan. At
the discretion of the Compensation Committee, a Stock Appreciation Right may be
exercisable only to the extent that a related award is exercisable and only upon
surrender of a related award.
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The Compensation Committee may provide any other terms or conditions with
regard to Stock Appreciation Rights that it deems appropriate.
Other Awards
The Compensation Committee may grant any other cash, stock or stock-related
awards to a Participant that the Compensation Committee deems appropriate,
including but not limited to, the bargain purchase of MFS Common Stock, and
stock bonuses.
Non-Employee Directors Formula Grant
The MFS 1993 Stock Plan provides that all Non-Employee Directors will
receive a grant of MFS Common Stock in lieu of the annual retainer fee otherwise
payable. Such grants will occur pursuant to the terms of the MFS 1993 Stock Plan
and without any further action by the Board or the Compensation Committee. On
the date of each annual meeting of stockholders, each Non-Employee Director will
automatically be granted in lieu of the annual retainer a number of shares of
MFS Common Stock equal to the annual retainer divided by the average fair market
value of the MFS Common Stock during the 10 trading days prior to such date.
Payment upon Exercise
Payment in full for the number of shares of MFS Common Stock purchased
under any Award, must be made to MFS at the time of such exercise. Payment for
such shares must be made in cash, or with the consent of the Compensation
Committee, in shares of Qualifying Stock (as defined in the MFS 1993 Stock
Plan), or any combination thereof. No fees or commissions are applicable to
purchases of MFS Common Stock under the MFS 1993 Stock Plan.
Withholding
With respect to any payments made to Participants under the MFS 1993 Stock
Plan, MFS will have the right to withhold any taxes required by law to be
withheld because of such payments. The Compensation Committee, in its sole
discretion, may permit a Participant to satisfy tax withholding obligations, in
whole or in part, either (i) by having MFS withhold from the shares of MFS
Common Stock to be issued upon the exercise of an Option or Stock Appreciation
Right or upon the receipt of an Award, shares having a fair market value equal
to the withholding amount due, or (ii) by delivering to MFS already-owned shares
to satisfy the withholding amount.
Adjustment for Recapitalization, Merger, Etc.
If any change is made to the shares of MFS Common Stock by reason of any
merger, consolidation, reorganization, recapitalization, stock dividend, split-
up, combination of shares, exchange of shares, change in corporate structure, or
otherwise, appropriate adjustments will be made by the Compensation Committee to
the kind and maximum number of shares subject to the MFS 1993 Stock Plan and the
kind and number of shares and price per share of stock subject to each
outstanding Award.
Transferability of Amended Awards
No grant of Options, or any right or interest therein, is assignable or
transferable except by will or the laws of descent and distribution. During the
lifetime of an optionee, Options are exercisable only by the optionee or his
legal representative. Similarly, Restricted Stock granted to Participants may
not be sold, transferred, pledged or otherwise encumbered during the restricted
period.
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Termination or Amendment
The Board may terminate the MFS 1993 Plan at any time, provided that no
such action shall deprive Participants of their rights under outstanding Awards.
The Board may also amend the Plan from time to time as its deems desirable and
shall make any amendments which may be required so that Options intended to be
Incentive Options shall at all times continue to be Incentive Options for the
purposes of the Code; provided, however, (i) without the requisite approval of
the stockholders, the MFS 1993 Stock Plan may not be amended where such
stockholder approval is required in order for the MFS 1993 Stock Plan to
continue to comply with Rule 16b-3 under the Exchange Act, and (ii) in any
event, the provisions of the MFS 1993 Stock Plan regarding formula grants of MFS
Common Stock to Non-Employee Directors may not be amended more than once every
six months, other than to comport with changes in the Code, the Employee
Retirement Income Security Act of 1974 or the rules thereunder.
Change in Control
The MFS 1993 Stock Plan provides that upon the occurrence of a Change in
Control (as defined in the MFS 1993 Stock Plan) (i) all Options (other than
Outperformance Options) and freestanding Stock Appreciation Rights will become
immediately exercisable in full, (ii) all restrictions with respect to
Restricted Stock will lapse, (iii) all Outperformance Options that are otherwise
outstanding will be canceled effective as of the fifteenth day prior to the
Change in Control and the holders of such awards will be entitled to receive, a
number of tandem Units equal to the number of Adjusted Shares applicable to the
canceled Outperformance Option (such number of Adjusted Shares determined
subject to the terms and conditions of the MFS 1993 Stock Plan), whether or not
such Outperformance Option was vested. Each Unit will entitle the holder to an
amount equal to the difference between the Change in Control Price (as defined
in the MFS 1993 Plan) and the Adjusted Price (determined as if the
Outperformance Option had not been terminated and had been exercised on the date
of the Change in Control). Such amounts will be payable in cash within twenty
(20) days following the Change in Control, and (iv) the Compensation Committee
may, in its sole discretion, provide for similar treatment with respect to any
other awards granted under the 1993 Plan.
SUMMARY OF AMENDMENTS TO THE MFS 1993 STOCK PLAN
As described above, the total number of shares of MFS Common Stock
authorized for issuance under the MFS 1993 Stock Plan (including any Awards
payable in cash but denominated as shares of MFS Common Stock) is 20,000,000, of
which approximately 10,500,000 shares remain available for issuance under the
MFS 1993 Stock Plan, and of which approximately 9,500,000 shares are subject to
outstanding Awards. The Amended Plan provides that the total number of shares of
MFS Common Stock which may be issued pursuant to awards ("Amended Awards") under
the Amended Plan will not exceed, in the aggregate, 25,000,000, including for
this purpose the shares subject to outstanding Awards.
Administration
The Amended Plan requires that the committee administering the Plan be
composed of "disinterested persons" within the meaning of Rule 16b-3 of the
Exchange Act.
Outperformance Options
The Amended Plan allows for the grant of Outperformance Options at the
discretion of the Compensation Committee. Outperformance Options will be
granted with respect to a specific number of shares of Common Stock at an
initial exercise price (the "Initial Price"). The Initial Price per share with
respect to an Outperformance Option will be the same as the closing price of one
share of MFS Common Stock on the date immediately preceding the date of grant.
The Initial Price will be adjusted upward or downward as of the date of exercise
(the "Adjusted Price") by a percentage equal to the annualized percentage
increase or decrease in the S&P (the "Annualized Percentage S&P Performance")
over the period beginning on the date of grant and ending on the trading day
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immediately preceding the date of exercise (the "Amended S&P Period"); provided,
that the Adjusted Price will never be less than the Initial Price unless the
closing price of the MFS Common Stock on the trading day immediately preceding
the date of exercise is no less than the Initial Price. For purposes of
determining the Annualized Percentage S&P Performance with respect to any
Amended S&P Period, the S&P as of the last day of the S&P Period will be deemed
to equal the average closing value of the S&P over the ten-consecutive-trading
day period ending on the last day of such Amended S&P Period. The term of each
Outperformance Option will be determined by the Compensation Committee, not to
exceed ten years from the date of grant.
Outperformance Options will become vested and exercisable in accordance
with terms and conditions established by the Compensation Committee. Unless
otherwise determined by the Compensation Committee, all Outperformance Options
will be canceled as of the fifteenth day prior to a Change in Control (as
defined in the Amended Plan). See "Change in Control." Upon the exercise of an
Outperformance Option, the Amended Plan provides for the distribution of (i) a
number of shares of MFS Common Stock with a fair market value equal to the
product of (A) the closing price of a share of MFS Common Stock on the trading
day immediately preceding the date of exercise minus the Adjusted Price,
multiplied by (B) a "Multiplier" (as defined below) plus (ii) cash in lieu of
fractional shares. The Multiplier will be determined on the date of exercise
based on the extent to which the annualized percentage change in fair market
value per share of MFS Common Stock (the "Annualized Percentage MFS Stock Price
Change") over the period beginning on the date of grant and ending on the
trading day immediately preceding the date of purported exercise (the "Amended
MFS Period") exceeds the annualized percentage change in the S&P (the
"Annualized Percentage S&P Change") over the corresponding Amended S&P Period.
The Multiplier will be a number between 2.5 and 8 depending upon the degree that
the Annualized Percentage MFS Common Stock Price Change exceeds the Annualized
Percentage S&P Change. In the alternative, upon the exercise of an
Outperformance Option, the Compensation Committee, in its discretion, may
require the optionee to pay, with respect to the portion of the Outperformance
Option being exercised, the Adjusted Price multiplied by the Multiplier in
return for a number of shares of MFS Common Stock equal to the product of the
number of shares relating to the portion of the Outperformance Option being
exercised multiplied by the Multiplier. Upon the exercise of an Outperformance
Option the Compensation Committee, in its discretion, may satisfy the exercise
of the Outperformance Option with any combination of MFS Common Stock, cash or
other economically equivalent benefit.
Each Outperformance Option will contain a tandem right to a number of units
("Units") equal to, as of any given date, the product of (i) the number of
shares relating to such Outperformance Option and (ii) the Multiplier that would
be applicable to such Outperformance Option if exercised on such given date.
Each Unit will entitle the holder to an amount of cash upon the occurrence of a
Change in Control as set forth above. See "Change in Control." The Units will
be canceled upon the exercise or cancellation of the corresponding
Outperformance Option (other than a cancellation in connection with a Change in
Control).
Transferability of Awards
The Amended Plan provides for limited transferability with respect to
Options other than Incentive Options (but including Outperformance Options).
Pursuant to the Amended Plan the Committee may, in its sole discretion, allow
for the transfer of Options (other than Incentive Options but including
Outperformance Options) to other persons or entities, subject to such
limitations as it may establish to ensure that transactions with respect to such
Options intended to be exempt from Section 16(b) of the Exchange Act pursuant to
Rule 16b-3 thereunder do not fail to maintain such exemption.
Change in Control
The Amended Plan provides that the accelerated vesting for Options, other
than Outperformance Options, and freestanding Stock Appreciation Rights and the
lapse of restrictions with respect to Restricted Stock upon a Change in Control
will only be implemented if an optionee's employment is terminated within two
years following the Change in Control without cause, as determined by the
Compensation Committee, or because of a Constructive Involuntary Termination, as
defined in the Plan.
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Retirement Vesting
The Amended Plan provides for accelerated vesting of Outperformance Options
and freestanding Stock Appreciation Rights and the immediate lapse of all
restrictions with respect to Restricted Stock with respect to an optionee upon
retirement from MFS at (i) age 62, (ii) age 61 with one year of service, (iii)
age 60 with two years of service, (iv) age 59 with three years of service, (v)
age 58 with four years of service, (vi) age 57 with five years of service, (vii)
age 56 with six years of service, or (viii) age 55 with seven years of service.
Non-Employee Directors Formula Grant
In addition to the payment of annual retainer fees to Non-Employee
Directors in the form of MFS Common Stock, the Amended Plan provides for the
payment of committee chair retainer fees, board meeting fees and committee
meeting fees in the form of MFS Common Stock in the same general manner as the
payment of annual retainer grant. The committee chair retainer grant will be
made annually on the date of each Annual Meeting. The board and committee
meeting grants will be made quarterly. All Non-Employee Director grants will be
based on the amount of fee otherwise due divided by the fair market value of a
share of MFS Common Stock at such time. In addition, the Amended Plan provides
for a one-time grant of 1,000 shares of MFS Common Stock to each Non-Employee
Director the Annual Meeting and subsequently, a one time grant of 1,000 shares
of MFS Common Stock to each new Non-Employee Director upon their first election
to the Board.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief discussion of the Federal income tax consequences
of transactions under the Amended Plan based on the Code, as in effect as of the
date hereof. The Amended Plan is not qualified under Section 401(a) of the
Code. This discussion is not intended to be exhaustive and does not describe
the state or local tax consequences.
Incentive Options. No taxable income is realized by the optionee upon the
grant or exercise of an Incentive Option. If MFS Common Stock is issued to an
optionee pursuant to the exercise of an Incentive Option, and if no
disqualifying disposition of such shares is made by such optionee within two
years after the date of grant or within one year after the transfer of such
shares to such optionee, then (1) upon sale of such shares, any amount realized
in excess of the exercise price will be taxed to such optionee as a long-term
capital gain and any loss sustained will be a long-term capital loss, and (2) no
deduction will be allowed to the optionee's employer for Federal income tax
purposes.
If the MFS Common Stock acquired upon the exercise of an Incentive Option
is disposed of prior to the expiration of either holding period described above,
generally (1) the optionee will realize ordinary income in the year of
disposition in an amount equal to the excess (if any) of the fair market value
of such shares at exercise (or, if less, the amount realized on the disposition
of such shares) over the exercise price paid for such shares, and (2) the
optionee's employer will be entitled to deduct such amount for Federal income
tax purposes if the amount represents an ordinary and necessary business
expense. Any further gain (or loss) realized by the optionee will be taxed as
short-term or long-term capital gain (or loss), as the case may be, and will not
result in any deduction by the employer.
Subject to certain exceptions for disability or death, if an Incentive
Option is exercised more than three months following the termination of
employment, the exercise of the Option will generally be taxed as the exercise
of a Non-Statutory Option.
Non-Statutory Options. Except as noted below, with respect to Non-
Statutory Options (including Outperformance Options), (1) no income is realized
by the optionee at the time the Option is granted; (2) generally, at exercise,
ordinary income is realized by the optionee in an amount equal to the difference
between the exercise price paid for the shares and the fair market value of the
shares, if unrestricted, on the date of exercise, and the optionee's employer is
generally entitled to a tax deduction in the same amount subject to applicable
tax withholding requirements; provided, that with respect to any exercise of an
Outperformance Option by any person
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who is an "insider" within the meaning of Section 16(b) of the Exchange Act,
income will not be realized (and the employer will not be entitled to a tax
deduction) until six months have elapsed from the date of such exercise (unless
the insider makes an election under Section 83(b) of the Code); and (3) at sale,
appreciation (or depreciation) after the date as of which amounts are includable
in income is treated as either short-term or long-term capital gain (or loss)
depending on how long the shares have been held.
NEW PLAN BENEFITS
Inasmuch as Awards to all participants except those to Non-Employee
Directors under the Amended Plan will be granted at the sole discretion of the
Compensation Committee, such benefits under the Amended Plan are not
determinable. As set forth above, Non-Employee Directors will receive automatic
grants of Non-Statutory Options annually for the number of shares of MFS Common
Stock equal to the fair market value of the shares on the date of grant divided
by the Non-Employee Directors annual retainer fee, annual committee chair
retainer fee, Board meeting fees and committee meeting fees. Non-Employee
Directors currently receive an annual retainer of $40,000, which is payable in
shares of MFS Common Stock, Board meeting fees of $1,000, and committee meeting
fees of $1,000. Committee chairs receive an annual retainer of $2,500. In
addition, each Non-Employee Director will receive an automatic one-time grant of
1,000 shares of MFS Common Stock at the Annual Meeting. Compensation paid and
other benefits granted in respect of the 1995 fiscal year to the named executive
officers are set forth in the Summary Compensation Table on page __.
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDED PLAN.
APPROVAL OF 1995 DEFERRED STOCK PURCHASE PLAN (AMENDED AND RESTATED AS OF
AUGUST 28, 1995) PROPOSAL
On July 25, 1995 MFS adopted and the stockholders subsequently approved the
MFS Communications, Inc. 1995 Deferred Stock Purchase Plan (the "Match Plan") to
encourage ownership of the MFS Common Stock by employees of MFS. The Match Plan
is part of MFS's "ShareWorks" program, which is comprised of the Match Plan and
the MFS Communications Company, Inc. Stock Bonus Plan. As of August 28, 1995,
MFS amended and restated the Match Plan (the "Amended Match Plan") to provide
for accelerated vesting of MFS's contribution to a participant's account under
the Amended Match Plan upon such participant's early retirement from MFS or its
subsidiaries and to restrict the accelerated vesting of MFS's contribution to a
participant's account, due to occur upon a Change in Control (as defined in the
Amended Match Plan), to situations in which the participant's employment with
MFS is terminated following such Change in Control. MFS is seeking stockholder
approval of the Match Plan in order to comply with the requirements of Rule 16b-
3, promulgated pursuant to Section 16(b) of the Exchange Act. Solely with
respect to participants in the Match Plan who are subject to Section 16 of the
Exchange Act, the provisions of the Match Plan as amended and restated are
subject to stockholder approval. In the event that the stockholders of MFS do
not approve the Amended Match Plan, the provisions of the Match Plan prior to
such amendment and restatement will apply to such persons subject to Section 16.
SUMMARY OF THE MATCH PLAN
The following summary of the Match Plan is qualified in its entirety by the
terms of the Match Plan, a copy of which has been filed with the Commission.
Purpose and Eligibility
The purpose of the Match Plan is to encourage employee ownership of the MFS
Common Stock by providing a convenient mechanism for employees of MFS to
purchase MFS Common Stock with the added incentive of a MFS match.
All full-time employees of MFS and its subsidiaries will be eligible to
participate in ShareWorks. However, employees of MFS and its subsidiaries hired
prior to September 1, 1995, all of whom have been or will be provided with a
targeted amount of stock option grants which they may receive pursuant to the
Amended and Restated 1993 Stock Plan, may elect to continue to receive stock
option grants in lieu of participating in ShareWorks. Six months after all of
such employee's stock options have been granted (which could be as long as five
years), such employee will be eligible to participate in ShareWorks.
Each employee who participates in ShareWorks will have the opportunity to
elect to defer compensation pursuant to the Match Plan, and consequently to
participate in the Match Plan.
Approximately 3,600 people are eligible for participation in ShareWorks
and, as a result, are eligible to participate in the Match Plan.
Administration
The Match Plan is administered by the Compensation Committee. The
Compensation Committee has the authority to make all determinations with regard
to the operation of the Match Plan not relegated to the participants pursuant to
the terms of the Match Plan and may make such rules and regulations for the
administration of the Match Plan as it deems desirable.
Compensation Deferrals
An eligible employee may participate in the Match Plan by filing an
election form with MFS indicating an amount of between 1% and 10% of his or her
compensation (in 1% increments) to be deferred into the Match Plan. Separate
elections must be made for base salary, and for bonuses and commissions. Base
salary deferral elections are made on a quarterly basis, effective as of the
beginning of the first pay period in the calendar quarter following the quarter
in which such election is made. Salary deferral elections may be amended or
revoked on a quarterly basis. Bonus and commission deferral elections are made
on an annual basis, no later than the end of the calendar year preceding the
year to which such election relates. Notwithstanding the above, an eligible
employee may elect to defer salary and/or bonus and commissions, on a
prospective basis, no later than 30 days following the effective date of the
Match Plan (October 1, 1995), or no later than 30 days following the time when
such person first becomes eligible for the Match Plan.
Salary deferrals will be deducted from each participating employee's bi-
weekly paycheck and deferrals of bonus and commission compensation will be
deducted at the time such bonus and commission compensation otherwise would be
paid (each such deferral a "Deferral Contribution"). All Deferral Contributions
will be made on a pre-tax basis. Deferral Contributions will be recorded on
MFS's books and will be attributed to participating employee accounts ("Deferral
Accounts"). Immediately upon the crediting of amounts to Deferral Accounts such
amounts will be converted into a number of MFS Common Stock units ("MFS Common
Stock Units") by dividing such amount by the fair market value of the MFS Common
Stock on the day prior to the effective date of the Deferral Contributions.
Deferral Contributions will not be taxable to participating employees at the
time of contribution.
Matching Contributions
At the time that any Deferral Contribution is credited to a Deferral
Account on behalf of a participating employee, MFS will record on its books and
attribute to such Participating Employee in an account (a "Matching Account") an
amount of MFS Common Stock Units equal to the number of MFS Common Stock Units
credited to the Deferral Account on account of the Deferral Contribution (a
"Matching Contribution").
Each Matching Contribution will vest and become nonforfeitable on the third
anniversary of the end of the calendar quarter in which such Matching
Contribution is first credited to a Matching Account; provided such
Participating Employee has remained continuously employed for the entire vesting
period. If the Participating Employee terminates employment for any reason, any
unvested MFS Common Stock Units in his or her Matching Account are forfeited.
Matching Contributions will not be taxable to the Participating Employees at the
time of contribution.
Distributions
Distributions of MFS Common Stock attributable to a Matching Contribution,
and of MFS Common Stock relating to the Deferral Contributions attributable to
such Matching Contribution, are made automatically at the time the Matching
Contribution vests. All distributions are made in the form of shares of MFS
Common Stock. The number of shares of MFS Common Stock distributed with each
distribution is equal to the number of MFS Common Stock Units attributable to
the contribution giving rise to the distribution. Distribution of MFS Common
Stock attributable to the entire balance of a participating employee's Deferral
Account will be made upon such person's termination of employment with MFS.
Earlier distributions of MFS Common Stock attributable to a Deferral Account are
allowed in the event of unforeseeable financial emergency. The value of all
distributions will be taxable to the participating employees as ordinary income
and MFS will be allowed a deduction in the same amount at the time of
distribution. MFS Common Stock with a value of any required tax withholding
will be withheld from each distribution.
Shares Available
Distributions of MFS Common Stock pursuant to the Match Plan will be funded
through the MFS 1993 Stock Plan. 25,000,000 shares of MFS Common Stock have
been reserved for issuance for all stock-based awards made pursuant to the MFS
1993 Stock Plan (5,000,000 of which are subject to stockholder approval under
Proposal No. 3), including distributions of shares of MFS Common Stock pursuant
to the Match Plan.
Change in Control
Upon the occurrence of a Change in Control (as defined in the Match Plan),
each participant shall receive, at the discretion of the Compensation Committee,
in complete settlement of the MFS Common Stock Units credited to his or her
Deferral Account and Matching Account, either (i) a number of shares of MFS
Common Stock equal to the number of MFS Common Stock Units so credited as of the
date on which such Change in Control occurs, (ii) an amount of cash equal to the
number of such MFS Common Stock Units multiplied by the Change in Control Price
(as defined in the Match Plan) or (iii) any equivalent combination of shares of
MFS Common Stock and cash.
Termination or Amendment
The Match Plan is an ongoing plan with no set termination date. The Board
may amend, suspend or terminate the Match Plan at any time without approval of
the stockholders provided that no such action will, without stockholder
approval, (a) materially increase the total number of shares of MFS Common Stock
which may be granted under the Match Plan, (b) materially expand the class of
persons eligible for participation in the Match Plan or (c) materially increase
the benefits accruing to participating employees under the Match Plan.
SUMMARY OF AMENDMENTS TO THE MATCH PLAN
Change in Control
The Amended Match Plan provides that the accelerated vesting of the MFS
Common Stock Units in a participant's Matching Account upon a Change in Control
will only be implemented if such participant's employment with MFS is terminated
without cause, as determined by the Compensation Committee, or because of a
Constructive Involuntary Termination, as defined in the Amended Match Plan
following such Change in Control.
Retirement Vesting
The Amended Match Plan provides for the accelerated vesting of MFS Common
Stock Units in a participant's Matching Account upon a participant's
termination of employment with MFS or a subsidiary at age 62 or after
attaining the age of 55 if such participant's age plus complete years of
service with MFS or a subsidiary totals at least 62.
New Plan Benefits
Because contributions made pursuant to the Amended Match Plan are
completely within the discretion of each participating employee, benefits under
the Match Plan are not determinable.
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDED MATCH PLAN.
MFS RATIFICATION OF THE SELECTION OF INDEPENDENT ACCOUNTANTS PROPOSAL
Upon recommendation of its Audit Committee, the MFS Board of Directors
proposes that the MFS stockholders ratify the selection of the firm of Coopers &
Lybrand L.L.P. to serve as the independent accountants of MFS for the 1996
fiscal year. Coopers & Lybrand L.L.P. also served as MFS' independent
accountants for the 1995 fiscal year. Unless otherwise directed by the
stockholders, proxies will be voted for approval of the selection of Coopers &
Lybrand L.L.P. to audit MFS' consolidated financial statements for the 1996
fiscal year. A representative of Coopers & Lybrand will attend the Annual
Meeting, and will be available to respond to questions and may make a statement
if he or she desires.
THE BOARD RECOMMENDS A VOTE FOR RATIFICATION.
OTHER MATTERS
It is not expected that any matters other than those described in this
Proxy Statement will be brought before the UUNET Special Meeting or the MFS
Annual Meeting. If any other matters are presented, however, it is the
intention of the persons named in the UUNET proxy and MFS proxy to vote the
proxy in accordance with the discretion of the persons named in such proxy.
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities
offered hereby and the Merger will be passed upon for MFS by Willkie Farr &
Gallagher, New York, New York. Certain tax matters with respect to the Merger
will be passed upon for MFS by Skadden, Arps, Slate, Meagher & Flom, New York,
New York. Certain tax matters in connection with the Merger will be passed upon
for UUNET by Heller Ehrman White & McAuliffe, Palo Alto, California.
-147-
<PAGE>
EXPERTS
The Consolidated Financial Statements of MFS Communications Company, Inc.
as of December 31, 1995 and 1994 and for each of the three years in the period
ended December 31, 1995 incorporated by reference to the Annual Report on Form
10-K of MFS Communications Company, Inc. for the year ended December 31, 1995,
have been incorporated in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The Consolidated Financial Statements and Schedule of UUNET as of December
31, 1995 and 1994 and for each of the three years in the period ended December
31, 1995 included in this Joint Proxy Statement-Prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
MFS STOCKHOLDER PROPOSALS
Any proposal which a stockholder intends to present at the MFS Annual
Meeting must be received by MFS on or before __________, 1996, but no earlier
than __________, 1996 to be included in the proxy material of MFS relating to
such meeting. In addition, such proposal must also include a brief description
of the business to be brought before the MFS annual meeting, the stockholder's
name and record address, the class or series and number of shares of MFS Capital
Stock which are owned beneficially or of record by such stockholder, a
description or any arrangements or understandings between the stockholder and
any other person in connection with such proposal and any material interest of
such stockholder in such proposal and a representation that the stockholder
intends to appear in person or by proxy at the MFS Annual Meeting. If the
stockholder wishes to nominate one or more persons for election as a director,
such stockholder's notice must comply with additional provisions as set forth in
the MFS By-laws, including certain information with respect to the persons
nominated for election as directors and any information relating to the
stockholder that would be required to be disclosed in a Proxy Filing. Any such
proposals should be directed to the Secretary, MFS Communications Company, Inc.,
11808 Miracle Hills Drive, Omaha, Nebraska 68154.
-148-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF
UUNET TECHNOLOGIES, INC.
Report of Independent Public Accountants.....................................F-2
Consolidated Balance Sheets at December 31, 1994 and 1995....................F-3
Consolidated Statements of Operations for the Three Years Ended December 31,
1995.........................................................................F-4
Consolidated Statements of Stockholders' Equity for the Three Years Ended
December 31, 1995............................................................F-5
Consolidated Statements of Cash Flows for the Three Years Ended December 31,
1995.........................................................................F-6
Notes to Consolidated Financial Statements ..................................F-7
Report of Independent Public Accountants ...................................F-20
Valuation and Qualifying Accounts...........................................F-21
Unaudited Condensed Consolidated Balance Sheets at December 31, 1995 and
March 31, 1996..............................................................F-22
Unaudited Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1995 and 1996......................................F-23
Unaudited Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1995 and 1996......................................F-24
Unaudited Notes to Condensed Interim Consolidated Financial Statements
for the Three Months Ended March 31, 1996.................................F-25
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To UUNET Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of UUNET
Technologies, Inc. (a Delaware corporation) and Subsidiaries, as of December
31, 1994 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of UUNET Technologies, Inc.,
and Subsidiaries, as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
January 31, 1996
F-2
<PAGE>
UUNET TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $10,493 $ 60,424
Accounts receivable, net of allowance of $455 and $1,647,
respectively, for doubtful accounts...................... 5,387 17,768
Inventories............................................... 1,214 1,251
Prepaid expenses and other current assets................. 1,253 2,149
------- --------
Total current assets........................................ 18,347 81,592
Property and equipment, net................................. 11,080 54,523
Investments in affiliates................................... -- 1,321
Other assets................................................ 198 174
------- --------
Total assets................................................ $29,625 $137,610
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable.......................... $ 1,060 $ 4,652
Accounts payable.......................................... 4,876 10,580
Accrued expenses.......................................... 4,826 24,604
Deferred revenues......................................... 3,315 3,421
------- --------
Total current liabilities................................... 14,077 43,257
Notes payable, net of current portion....................... 1,196 13,686
------- --------
Total liabilities........................................... 15,273 56,943
------- --------
Commitments and contingencies (Notes 6 and 9)
Redeemable Convertible Preferred Stock, $.001 par value;
(Notes 1 and 4):
Series A, B, C, D and E, 20,000 shares authorized; 11,150
shares issued
and outstanding as of December 31, 1994.................. 14,073 --
------- --------
Stockholders' equity (Notes 1 and 5):
Preferred Stock, $.001 par value; 500 shares authorized as
of December 31, 1995; none issued or outstanding......... -- --
Common Stock, $.001 par value; 50,000 shares authorized as
of December 31, 1995; 10,393 and 32,057 shares issued and
outstanding as of December 31, 1994 and 1995,
respectively............................................. 10 32
Additional paid-in capital................................ 9,584 108,071
Deferred compensation..................................... (207) (165)
Notes receivable from officers and stockholders (Note 5).. (113) --
Foreign currency translation adjustment................... 301 282
Accumulated deficit....................................... (9,296) (27,553)
------- --------
Total stockholders' equity.................................. 279 80,667
------- --------
Total liabilities and stockholders' equity.................. $29,625 $137,610
======= ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
UUNET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Revenues:
Internet services................................ $10,039 $16,860 $ 71,521
Software......................................... 13,980 16,278 22,940
------- ------- --------
Total revenues................................. 24,019 33,138 94,461
------- ------- --------
Costs and expenses:
Cost of revenues--
Internet services.............................. 6,452 10,262 46,393
Software....................................... 7,240 9,369 12,946
Network operations and support................... 3,850 6,764 13,127
Sales and marketing.............................. 5,558 9,681 18,762
General and administrative....................... 2,248 5,288 12,709
Acquisition expense.............................. -- -- 11,067
------- ------- --------
Total costs and expenses....................... 25,348 41,364 115,004
------- ------- --------
Loss from operations............................... (1,329) (8,226) (20,543)
Interest income.................................... 36 440 2,747
Interest expense................................... (103) (76) (808)
Equity in net loss of affiliates................... -- -- (127)
Loss on sale of investment in related party (Note
7)................................................ (433) -- --
------- ------- --------
Loss before income taxes........................... (1,829) (7,862) (18,731)
Benefit (provision) for income taxes (Note 10)..... (197) (126) 474
------- ------- --------
Net loss........................................... $(2,026) $(7,988) $(18,257)
======= ======= ========
Unaudited pro forma data (Note 1):
Pro forma net loss per common and equivalent
share........................................... $ (0.35) $ (0.63)
Shares used in computing pro forma net loss per
common and equivalent share..................... 22,946 28,987
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
UUNET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------
NOTES
REDEEMABLE RECEIVABLE
CONVERTIBLE FROM FOREIGN RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL OFFICERS CURRENCY EARNINGS
---------------- ------------- PAID-IN DEFERRED AND TRANSLATION (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS ADJUSTMENT DEFICIT)
------- ------- ------ ------ ---------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1992, AS PREVIOUSLY
REPORTED............... 100 $ 200 5,100 $ 5 $ -- $ -- $-- $-- $ 582
Adjustment for pooling
of interests with
Unipalm (Note 1)...... 200 314 2,205 2 1,061 -- -- 255 392
------- ------- ------ --- -------- ----- ---- ---- --------
BALANCE, DECEMBER 31,
1992, AS RESTATED...... 300 514 7,305 7 1,061 -- -- 255 974
Issuance of Series A
Preferred Stock, net
of issuance costs of
$24, together with
warrants to purchase
Series B Preferred
Stock................. 4,119 2,476 -- -- -- -- -- -- --
Redemption of Unipalm
Preferred Stock....... (200) (314) -- -- -- -- -- -- --
Foreign currency
translation
adjustment............ -- -- -- -- -- -- -- (342) --
Unipalm fiscal year
conversion (Note 1)... -- -- -- -- -- -- -- -- (127)
Net loss............... -- -- -- -- -- -- -- -- (2,026)
------- ------- ------ --- -------- ----- ---- ---- --------
BALANCE, DECEMBER 31,
1993, AS RESTATED...... 4,219 2,676 7,305 7 1,061 -- -- (87) (1,179)
Issuance of Series B
Preferred Stock, net
of issuance costs of
$15................... 3,300 3,285 -- -- -- -- -- -- --
Issuance of Series C
Preferred Stock, net
of issuance costs of
$58................... 3,631 8,112 -- -- -- -- -- -- --
Exercise of stock
options and stock
purchase rights....... -- -- 2,170 2 320 -- (113) -- --
Deferred compensation.. -- -- -- -- 208 (208) -- -- --
Amortization of
deferred
compensation.......... -- -- -- -- -- 1 -- -- --
Sale of Common Stock in
connection with an
initial public
offering by Unipalm,
net of issuance costs
of $880 (Note 1)...... -- -- 918 1 7,995 -- -- -- --
Foreign currency
translation
adjustment............ -- -- -- -- -- -- -- 388 --
Dividends distributed
by Unipalm............ -- -- -- -- -- -- -- -- (129)
Net loss............... -- -- -- -- -- -- -- -- (7,988)
------- ------- ------ --- -------- ----- ---- ---- --------
BALANCE, DECEMBER 31,
1994, AS RESTATED...... 11,150 14,073 10,393 10 9,584 (207) (113) 301 (9,296)
Issuance of Series D
Preferred Stock, net
of issuance costs of
$45, together with
warrant to purchase
Series E Preferred
Stock................. 1,664 3,849 -- -- -- -- -- -- --
Issuance of Series E
Preferred Stock....... 2,500 12,500 -- -- -- -- -- -- --
Sale of Common Stock in
connection with an
initial public
offering, net of
issuance costs of
$6,576................ -- -- 5,309 5 67,742 -- -- -- --
Conversion of Preferred
Stock in connection
with an initial public
offering.............. (15,314) (30,422) 15,314 15 30,407 -- -- -- --
Exercise of stock
options and stock
purchase rights....... -- -- 889 1 338 -- -- -- --
Issuance of Common
Stock for Unipalm
outstanding options
(Note 1).............. -- -- 152 1 -- -- -- -- --
Amortization of
deferred
compensation.......... -- -- -- -- -- 42 -- -- --
Repayment of notes
receivable............ -- -- -- -- -- -- 113 -- --
Foreign currency
translation
adjustment............ -- -- -- -- -- -- -- (19) --
Net loss............... -- -- -- -- -- -- -- -- (18,257)
------- ------- ------ --- -------- ----- ---- ---- --------
BALANCE, DECEMBER 31,
1995................... -- $ -- 32,057 $32 $108,071 $(165) $-- $282 $(27,553)
======= ======= ====== === ======== ===== ==== ==== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
UUNET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(2,026) $(7,988) $(18,257)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities--
Unipalm fiscal year conversion................. (127) -- --
Depreciation and amortization.................. 1,209 2,151 8,322
Stock option compensation...................... -- 1 42
Write-off of property and equipment............ 350 582 1,846
Loss on sale of investment in related party.... 433 -- --
Equity in net loss of affiliates............... -- -- 127
Cash provided by (used in) changes in assets
and liabilities:
Accounts receivable, net..................... (58) (2,333) (12,430)
Inventories.................................. (90) (414) (39)
Prepaid expenses and other current assets.... (294) (515) (906)
Accounts payable............................. 1,042 2,124 5,741
Accrued expenses............................. 745 2,862 19,875
Deferred revenues............................ 304 2,312 111
------- ------- --------
Net cash provided by (used in) operating activ-
ities......................................... 1,488 (1,218) 4,432
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment.............. (3,121) (9,394) (53,654)
Repayments of notes receivable from officers and
stockholders.................................... -- -- 113
Investments in affiliates........................ (15) -- (1,462)
Advances to related party........................ (266) -- --
Repayments from related party.................... 475 -- --
------- ------- --------
Net cash used in investing activities.......... (2,927) (9,394) (55,003)
------- ------- --------
Cash flows from financing activities:
Proceeds from notes payable...................... 435 1,302 20,766
Repayments of notes payable...................... (683) (740) (4,641)
Proceeds from sale of Preferred Stock, net....... 2,476 11,397 16,349
Proceeds from sale of Common Stock, net.......... -- 8,205 68,087
Redemption of shares............................. (314) -- --
Dividends distributed by Unipalm................. -- (129) --
------- ------- --------
Net cash provided by financing activities...... 1,914 20,035 100,561
------- ------- --------
Effect of foreign currency exchange rate changes on
cash and
cash equivalents.................................. 197 213 (59)
------- ------- --------
Net increase in cash and cash equivalents.......... 672 9,636 49,931
Cash and cash equivalents, beginning of period..... 185 857 10,493
------- ------- --------
Cash and cash equivalents, end of period........... $ 857 $10,493 $ 60,424
======= ======= ========
Supplemental disclosure of cash flow information:
Cash paid for interest........................... $ 196 $ 121 $ 718
Cash paid for income taxes....................... 250 202 41
Supplemental disclosure of noncash financing activ-
ities:
Stockholder notes received for shares of Common
Stock........................................... -- 113 --
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
Organization and Operations
UUNET Technologies, Inc. ("UUNET") was incorporated in the state of Delaware
in 1990. UUNET and its wholly-owned subsidiaries are collectively referred to
herein as the "Company." The Company is a leading worldwide provider of a
comprehensive range of Internet access options, applications, and consulting
services to businesses, professionals and on-line services providers. The
Company's Internet access options provide dedicated and dial-up Internet
access. Other applications and services include Web server hosting and
integration services, client software and security products, training, and
network integration and consulting services. In addition, the Company
developed, operates and maintains the high speed dial-up network for Microsoft
Corporation ("Microsoft").
The Company has incurred cumulative losses of approximately $28.3 million
during the three-year period ended December 31, 1995. The Company's operations
are subject to certain risks and uncertainties including, among others, actual
and potential competition by entities with greater financial resources,
experience and market presence than the Company, risks associated with
consolidation in the industry, risks associated with acquisitions and
international expansion, the need to manage growth and expansion, certain
technology and regulatory risks, and dependence upon sole and limited source
suppliers. See "Risk Factors" elsewhere is this Joint Proxy Statement-
Prospectus.
Acquisition of Unipalm
On November 15, 1995, UUNET acquired Unipalm Group plc ("Unipalm"), a
provider of Internet access options, networking software, training and
consulting services in the United Kingdom and Europe. Under the terms of the
tender offer made by UUNET, Unipalm shareholders received 0.1543 of a share of
UUNET Common Stock for each Unipalm share. Each holder of a Unipalm option
received 0.1543 of a share of UUNET Common Stock for each option, after taking
into account the fair market value of such options. Accordingly, UUNET issued
3,338,009 shares of its Common Stock for all of the outstanding shares of
Unipalm stock and options to acquire shares of Unipalm stock, and paid cash
for fractional shares. The acquisition was accounted for as a pooling of
interests and, as such, UUNET's financial statements have been restated to
include the results of Unipalm for all periods presented.
Combined and separate results of UUNET and Unipalm during the periods
preceding the acquisition are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- -------------
1993 1994 1995
------- ------- ----
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Previously reported..................... $ 7,895 $12,414 $33,394
Unipalm................................. 16,124 20,724 27,260
------- ------- -------
Total................................. $24,019 $33,138 $60,654
======= ======= =======
Net income (loss):
Previously reported..................... $(2,244) $(6,949) $ (750)
Unipalm................................. 218 (1,039) (5,641)
------- ------- -------
Total................................. $(2,026) $(7,988) $(6,391)
======= ======= =======
</TABLE>
F-7
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED):
Unipalm previously had an April 30 fiscal year-end. In order to conform
Unipalm's fiscal year-end to UUNET's calendar year-end, the statement of
operations for Unipalm for its fiscal year ended April 30, 1994 has been
combined with UUNET's statement of operations for its year ended December 31,
1993. The consolidated statement of operations for the year ended December 31,
1993 includes four months (January 1, 1994 through April 30, 1994) which are
also included in the consolidated statement of operations for the year ended
December 31, 1994. Accordingly, an adjustment has been made in the year ended
December 31, 1993 to retained earnings for the duplication of net income of
$127,000 for such four month period. Revenues of Unipalm for that four-month
period were approximately $6.1 million.
In connection with the acquisition, the Company recorded one-time charges in
the fourth quarter of 1995 for acquisition-related costs of $11.1 million.
These costs consisted primarily of investment banking and professional fees,
and direct costs necessary to complete the transaction, including taxes and
printing and mailing costs.
Investments in Affiliates
The following summarizes the Company's investments in various international
Internet access and related services providers (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
-------------
<S> <C> <C>
Accounted for by the equity method......................... $ -- $ 484
Accounted for by the cost method........................... -- 837
----- -------
Total.................................................... $ -- $ 1,321
===== =======
</TABLE>
Subsequent to year end, UUNET acquired a 40% interest in the outstanding
capital of EUnet Deutschland GmbH ("EUnet Germany"), a provider of Internet
access options, applications and consulting services in Germany, for $1.6
million.
In January 1996, UUNET and UUNET Canada, Inc. ("UUNET Canada") entered into
a letter of intent providing for an increase in UUNET's equity ownership of
UUNET Canada from 20% to 51%. On April 1, 1996, UUNET paid $3,585,329 in cash
and issued 27,079 shares of Common Stock for the additional 31 percent
interest in UUNET Canada.
Initial Public Offerings
In May 1995, UUNET completed an initial public offering of 5,433,750 shares
of Common Stock at a price per share of $14.00, of which 5,308,750 shares were
sold by UUNET and 125,000 shares were sold by a selling stockholder. After the
underwriting discounts, commissions and other expenses, net proceeds to UUNET
from the initial public offering were approximately $67.7 million. Upon the
closing of the initial public offering, all outstanding shares of Redeemable
Convertible Preferred Stock, including those shares issued in connection with
warrants for the purchase of 2,500,000 shares of Series E Preferred Stock
exercised immediately prior to the closing of the initial public offering,
automatically converted into Common Stock.
In March 1994, Unipalm completed an initial public offering, with net
proceeds of approximately $8.0 million.
F-8
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED):
Summary of Significant Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during
the reporting periods and reported amounts of assets and liabilities at the
date of the financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of UUNET and all
majority-owned subsidiaries. All material intercompany balances and
transactions have been eliminated. Investments in affiliated companies owned
20% or more are accounted for using the equity method, while investments in
companies owned less than 20% are accounted for using the cost method.
Pro Forma Net Loss Per Common and Equivalent Share
Pro forma net loss per common and equivalent share is based on the weighted
average number of shares outstanding during the periods presented. Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletin No. 83, all
shares, options and warrants issued during the twelve months immediately
preceding the initial public offering were treated as if they had been
outstanding through March 31, 1995, using the treasury stock method and at a
per share price of $14.00, the initial public offering price. Subsequent to
March 31, 1995, the effects of warrants and options have not been considered
because the effect would be antidilutive.
Earnings per share data prior to 1994 has been omitted because the automatic
conversion of the Redeemable Preferred Stock into Common Stock materially
changed UUNET's capitalization. Fully-diluted loss per share is not presented
as it would not materially differ from primary loss per share.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents as
of December 31, 1994 consisted of U.S. Treasury Bills totaling approximately
$3.0 million. Cash equivalents as of December 31, 1995 consisted of short-term
commercial paper totaling approximately $8.7 million. As of December 31, 1994
and 1995, the fair value of these securities approximated cost.
Concentrations of Cash and Accounts Receivable
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, cash equivalents and accounts
receivable. As of December 31, 1994, the Company had concentrations of cash in
two banks in the form of demand deposits and money market accounts, totaling
approximately $1.2 million at one bank and $5.8 million at the other bank. As
of December 31, 1995, the Company had concentrations of cash in a financial
institution money market fund of approximately $47.8 million and short-term
commercial paper of approximately $8.7 million. Also as of December 31, 1995,
UUNET had approximately $6.4 million in accounts receivable from Microsoft
(see Note 2). The Company believes that concentrations of credit risk with
respect to the remaining balance in accounts receivable are limited due to the
large number of entities comprising the Company's customer base. The Company
maintains an allowance for doubtful accounts for accounts receivable based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market,
and consist primarily of third party packaged software for resale.
F-9
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED):
Property and Equipment
Property and equipment are recorded at cost. Depreciation, including
depreciation of assets acquired under capital lease agreements, is recorded on
a straight-line basis for financial reporting purposes. Property and equipment
consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- USEFUL LIVES
1994 1995 (IN YEARS)
------- ------- ------------
<S> <C> <C> <C>
Network and computer equipment............. $11,480 $58,244 4- 5
Furniture and office equipment............. 1,743 6,899 4-10
Purchased software......................... 1,357 1,908 3- 4
Vehicles................................... 693 1,029 4
------- -------
Property and equipment, at cost............ 15,273 68,080
Less--Accumulated depreciation............. (4,193) (13,557)
------- -------
Property and equipment, net.............. $11,080 $54,523
======= =======
</TABLE>
The Company leases certain vehicles and computer equipment under
noncancelable capital leases. Total cost of equipment capitalized under
capital leases as of December 31, 1994 and 1995 was approximately $1,398,000
and $5,220,000, respectively, while related accumulated depreciation was
approximately $405,000 and $1,478,000, respectively.
Accrued Expenses
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ -------
<S> <C> <C>
Network costs............................................. $ 912 $10,501
Acquisition expenses...................................... -- 7,377
Compensation and benefits................................. 2,009 3,407
Professional fees......................................... 467 820
Other..................................................... 1,438 2,499
------ -------
Total................................................... $4,826 $24,604
====== =======
</TABLE>
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated at the
exchange rate in effect at each year-end. Statements of operations accounts
are translated at the average rate of exchange during the year. Translation
adjustments arising from differences in exchange rates from period to period
are included in the foreign currency translation adjustment account in
stockholders' equity. Gains and losses from transactions denominated in a
foreign currency are included in operations currently.
Revenue Recognition
Internet services revenues consist primarily of monthly service fees,
equipment sales and installation charges. Service fees consist of fixed
monthly amounts and/or hourly amounts based on usage and are recognized as the
service is provided. Payments received in advance of providing services are
deferred until the period such services are provided. Equipment sales and
installation charges are recognized when installation is completed.
F-10
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED):
Revenues under network agreements (Note 2) are included in Internet services
revenues and are recognized as costs are incurred plus the applicable fees
earned. Adjustments to fees provided as incentives under contract provisions
and estimated losses on contracts, if any, are recorded when such adjustments
or losses are known.
Software revenues consist primarily of the sale of packaged third party
software. The Company recognizes revenue on software product sales at the time
of delivery of the software, provided no significant future vendor obligations
exist. Customer support fees are deferred and recognized ratably over the
period of the service obligation.
Cost of Revenues
Internet services cost of revenues consists primarily of network
telecommunication costs, depreciation of network equipment, and the cost of
equipment and other products sold to customers. Software cost of revenues
consists primarily of packaged third party software costs.
Network Operations and Support
Network operations and support expenses consists primarily of the costs of
operating and monitoring the network and providing technical support to
customers.
Recent Pronouncement
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-
Based Compensation," which is effective for the Company's December 31, 1996
financial statements. SFAS No. 123 allows companies to either account for
stock-based compensation under the new provisions of SFAS No. 123 or under the
provisions of APB 25, but requires pro forma disclosure in the footnotes to
the financial statements as if the measurement provisions of SFAS 123 had been
adopted. The Company intends to continue accounting for its stock-based
compensation in accordance with the provisions of APB 25. As such, the
adoption of SFAS No. 123 will not impact the financial position or the results
of operations of the Company.
2. NETWORK AGREEMENTS:
In December 1994, UUNET and Microsoft entered into a binding Memorandum of
Understanding, which was formalized into a definitive agreement (the
"Microsoft Agreement") in March 1995, for the development, operation and
maintenance of a high speed dial-up and ISDN TCP/IP access network (the "Dial-
Up Network"). Microsoft is obligated to reimburse UUNET for the cost of
constructing, maintaining and operating the Dial-Up Network, as well as pay a
management fee. The initial term of the Microsoft Agreement expires in March
2000, and it may be extended by Microsoft for an additional five-year term. In
March 1995 and as part of this strategic relationship, Microsoft purchased
1,664,000 shares of Series D Preferred Stock at $2.34 per share and in May
1995 exercised warrants to purchase 2.5 million shares of Series E Preferred
Stock at $5.00 per share (Notes 4 and 5). Upon closing of the initial public
offering, Microsoft's Preferred Stock was converted into 4,164,000 shares of
Common Stock. UUNET also entered into a $26.0 million loan agreement (Note 3)
with Microsoft, which allows UUNET to borrow funds to finance the purchase of
equipment for the construction of the Dial-Up Network. UUNET owns the network
equipment, subject to Microsoft's security interest. UUNET controls and
operates the Dial-Up Network and is able to sell a portion of the Dial-Up
Network capacity to other customers. Revenues from network services relating
to the Dial-Up Network represented 20.4% of total revenues for the year ended
December 31, 1995.
F-11
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. BORROWING ARRANGEMENTS:
In December 1994, UUNET entered into a Credit Agreement with a bank to
provide for a $500,000 working capital line of credit ("Working Capital
Facility"), a $1,000,000 term facility ("Term Facility") and a $3,500,000
equipment facility ("Equipment Facility"). No amounts had been borrowed under
the Working Capital Facility, which expired in August 1995. The Term Facility
and Equipment Facility accrued interest at the bank's prime rate plus 1.75%
(10.5% at December 31, 1994). As of December 31, 1994, UUNET had borrowed the
$1,000,000 available under the Term Facility, which was repaid in June 1995.
During 1995, UUNET borrowed approximately $2,500,000 under the Equipment
Facility, all of which was repaid in June 1995. The Term Facility and
Equipment Facility expired in 1995.
UUNET had notes payable to a related party (Note 7) that were due in monthly
installments through December 1995. Interest was fixed at rates of 8% or 10%,
and the notes were secured by specified network computer equipment of UUNET.
The notes were repaid in full in April 1995. Interest expense on these notes
was approximately $58,000, $33,000 and $4,000 in 1993, 1994 and 1995,
respectively. UUNET also had a note payable to a stockholder ($59,000 at
December 31, 1993) that was due and repaid in full in September 1994. Interest
accrued at 8% annually.
In connection with the Microsoft Agreement, UUNET obtained a $26.0 million
equipment loan facility from Microsoft to finance equipment purchases in
conjunction with the construction of the Dial-Up Network. Principal and
interest, at the higher of the Applicable Federal Rate ("AFR") in effect on
the date of the Microsoft Agreement (7.74%) or the AFR in effect at the time
of the advance (5.79% as of December 31, 1995), are payable on each advance
quarterly over five years. Borrowings under the agreement are collateralized
by the equipment purchased. The carrying amount of the equipment loan facility
as of December 31, 1995 approximated fair market value. As of December 31,
1995, $10,501,000 was available for future advances under this facility.
Notes payable outstanding consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------- -------
<S> <C> <C>
Note payable to Microsoft............................... $ -- $14,595
Notes payable to banks.................................. 1,000 --
Notes payable to related parties........................ 199 --
Capital leases.......................................... 1,057 3,743
------- -------
Total obligations..................................... 2,256 18,338
Less: Current portion................................... (1,060) (4,652)
------- -------
Long-term obligations................................... $ 1,196 $13,686
======= =======
</TABLE>
Aggregate future principal payments on notes payable and future minimum
lease payments under capital leases as of December 31, 1995, are as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL
DECEMBER 31, NOTES LEASES TOTAL
------------ ------- ------- -------
<S> <C> <C> <C>
1996............................................ $ 3,100 $ 1,833 $ 4,933
1997............................................ 3,100 1,630 4,730
1998............................................ 3,100 550 3,650
1999............................................ 3,100 86 3,186
2000............................................ 2,195 -- 2,195
------- ------- -------
14,595 4,099 18,694
Less: Amount representing interest.............. -- (356) (356)
------- ------- -------
Total......................................... $14,595 $ 3,743 $18,338
======= ======= =======
</TABLE>
F-12
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Redeemable Convertible Preferred Stock consists of the following (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
-------------- -------------
SHARES AMOUNT SHARES AMOUNT
------ ------- ------ ------
<S> <C> <C> <C> <C>
Series A Preferred Stock, $.001 par value; 4,219
shares designated and authorized as Series A;
preference in liquidation of $0.64 per share,
$2,700 in the aggregate.......................... 4,219 $ 2,676 -- $--
Series B Preferred Stock, $.001 par value; 3,300
shares designated and authorized as Series B;
preference in liquidation of $1.00 per share,
$3,300 in the aggregate.......................... 3,300 3,285 -- --
Series C Preferred Stock, $.001 par value; 4,000
shares designated and authorized as Series C;
preference in liquidation of $2.25 per share,
$8,170 in the aggregate.......................... 3,631 8,112 -- --
Series D Preferred Stock, $.001 par value, 1,664
shares designated and authorized as Series D;
preference in liquidation of $2.34 per share..... -- -- -- --
Series E Preferred Stock, $.001 par value, 2,500
shares designated and authorized as Series E;
preference in liquidation of $5.00 per share..... -- -- -- --
------ ------- --- ----
Total........................................... 11,150 $14,073 -- $--
====== ======= === ====
</TABLE>
Preferred Stock Warrants
In connection with the sale of Series A Preferred Stock in 1993, UUNET
issued warrants for the purchase of 3,300,000 shares of Series B Preferred
Stock at an exercise price of $1.00 per share. These warrants were exercised
during 1994, which resulted in gross proceeds of $3,300,000 to UUNET.
As part of its strategic relationship with Microsoft, UUNET issued warrants
to Microsoft for the purchase of 2,500,000 shares of Series E Preferred Stock
in March 1995, at an exercise price of $5.00 per share. These warrants were
exercised in May 1995, which resulted in gross proceeds of $12.5 million to
UUNET.
5. STOCKHOLDERS' EQUITY:
Microsoft has agreed that it will not directly or indirectly, except in
connection with any exercise of its right of first refusal, acquire shares of
Common Stock which when combined with its holdings, would result in Microsoft
owning greater than 18.11% of the then outstanding shares of Common Stock.
Microsoft also has agreed that it will not (i) enter into any voting agreement
or voting trust in connection with UUNET securities, (ii) form, or participate
in the formation of, any legal entity for the purpose of acquiring, voting or
disposing of UUNET securities, or (iii) act in concert with any person or
entity for the purpose of acquiring, holding, voting or disposing of UUNET
securities if by so acting Microsoft or such other person would be required to
file a Schedule 13D or 13G with the Securities and Exchange Commission or to
amend a previously filed Schedule 13D or 13G. UUNET has granted Microsoft a
right of first refusal and a right of first offer with respect to certain
acquisitions of more than 50 percent of the stock or assets of UUNET that may
be proposed in the future.
Increase in Authorized Shares
On January 31, 1996, the stockholders of UUNET at a Special Meeting of
Stockholders approved the increase in the authorized shares of Common Stock to
175,000,000, and UUNET filed a Certificate of Amendment to Restated
Certificate of Incorporation effecting such increase.
F-13
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. STOCKHOLDERS' EQUITY--(CONTINUED):
Notes Receivable from Employees for Stock Purchases
During 1994, certain employees of UUNET signed promissory notes in favor of
UUNET in conjunction with the purchase of stock under the terms and conditions
of UUNET's Incentive Stock Plan. The loans accrued interest at 8% annually and
were repaid during 1995.
Incentive Stock and Equity Incentive Plans
UUNET's Incentive Stock Plan (the "Option Plan") was adopted in 1990 and was
terminated on May 25, 1995. Under the Option Plan, the Board of Directors of
UUNET had the authority to grant incentive stock options, nonqualified stock
options and stock purchase rights at their discretion. Options granted under
the Option Plan are exercisable for periods up to ten years from the date of
grant. All options outstanding on the date of the Option Plan termination
remained exercisable in accordance with their terms.
In 1995, UUNET adopted an Equity Incentive Plan (the "Incentive Plan"),
which provides for the grant of options, restricted stock, stock purchase
rights and performance shares to employees of the Combined Company. Incentive
stock options and nonqualified stock options may be granted under the
Incentive Plan at exercise prices of 100% and at least 85%, respectively, of
the fair market value of Common Stock at the date of grant. Restricted stock
awards consist of shares of Common Stock with transfer restrictions that lapse
over a period not to exceed ten years. Stock purchase rights provide for the
purchase of shares of Common Stock at a price of at least 85% of the Common
Stock's fair market value. These stock purchase rights are generally
exercisable for a period of 30 days after the date of grant. Performance
awards of shares of Common Stock may be granted for attainment of performance
criteria determined by the Board of Directors of UUNET. A total of 2,669,514
shares of Common Stock were reserved for issuance under the Incentive Plan and
the Option Plan. Any shares not issued or reserved under the Option Plan
become available for issuance under the Incentive Plan. On January 31, 1996,
the stockholders of UUNET at a Special Meeting of Stockholders approved an
increase in the number of shares reserved for issuance under the Incentive
Plan to 6,669,514.
The following table summarizes all option and purchase right activity under
the Option Plan and the Incentive Plan for the three years ended December 31,
1995:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- --------------
<S> <C> <C>
Outstanding as of December 31, 1992............ 350,000 $ 1.00
Granted...................................... 175,000 1.00
---------- ------------
Outstanding as of December 31, 1993............ 525,000 1.00
Granted...................................... 4,680,450 0.05-$ 0.25
Exercised.................................... (2,110,950) 0.05- 0.25
Canceled..................................... (1,160,042) 0.05- 0.16
---------- ------------
Outstanding as of December 31, 1994............ 1,934,458 0.05- 1.00
Granted...................................... 991,150 5.00- 75.00
Exercised.................................... (862,661) 0.05- 1.00
Canceled..................................... (86,783) 0.05- 45.00
---------- ------------
Outstanding as of December 31, 1995............ 1,976,164 $0.05-$75.00
========== ============
</TABLE>
As of December 31, 1994 and 1995, options to purchase 771,049 and 383,751
shares, respectively, were exercisable.
F-14
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. STOCKHOLDERS' EQUITY--(CONTINUED):
Compensation equal to the difference between the assumed fair value of
Common Stock at the grant date and the exercise price of the options, if any,
is recognized ratably over the vesting period. Compensation expense related to
options granted in 1994 is approximately $207,000 and will be recognized over
the vesting period, which is generally five years. Compensation expense
relating to stock options was $1,000 in 1994 and $42,000 in 1995.
Prior to the acquisition, Unipalm maintained its own stock option plan.
Stock options granted under the Unipalm plan were 194,078 and 39,347 in 1994
and 1995, respectively. The statement of stockholders' equity reflects the
exercise of vested options of 36,862 and 26,089 in 1994 and 1995,
respectively. All remaining Unipalm options outstanding at the time of the
acquisition were exchanged for UUNET Common Stock.
1995 Performance Option Plan
In 1995, UUNET adopted the 1995 Performance Option Plan (the "Performance
Plan") that provides for grants of nonqualified stock options to purchase
shares of Common Stock to employees of UUNET. Options to purchase 161,180
shares of Common Stock at an exercise price of $6.00 per share were granted in
February 1995, of which options to purchase 17,600 shares were canceled as of
December 31, 1995. Options granted under the Performance Plan were exercisable
on December 31, 2004, subject to acceleration provisions if the Company met
performance goals specified in the Performance Plan. Such performance goals
were achieved in 1995, resulting in the acceleration of vesting of the options
outstanding under the Performance Plan to March 31, 1996.
Employee Stock Purchase Plan
In 1995, UUNET adopted the Employee Stock Purchase Plan (the "Purchase
Plan") to permit employees of UUNET to purchase Common Stock at a price equal
to 85% of the lesser of the fair market value at the beginning or end of the
enrollment period as defined by the Purchase Plan. The first enrollment period
begins in February 1996.
Nonemployee Directors Stock Option Plan
In 1995, UUNET adopted the Nonemployee Directors Stock Option Plan (the
"Directors Plan") to grant nonqualified stock options to directors of UUNET
who are not employees. Eligible nonemployee directors will be granted an
option to purchase 7,500 shares of Common Stock on the day of their election,
re-election or appointment. The exercise price of all options will be equal to
the fair market value of Common Stock on the grant date. The options will vest
ratably over a three-year period. As of December 31, 1995, no options had been
granted under the Directors Plan.
Reserved Shares
The Company has reserved 6,843,565 shares of Common Stock for issuance
pursuant to stock plans as of January 31, 1996.
F-15
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES:
Telecommunications Lines
The Company has guaranteed monthly usage levels with various communications
vendors through January 2009. As of December 31, 1995, the annual commitments
(exclusive of usage discounts) were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
- ------------------------- --------
<S> <C>
1996................................................................... $ 37,448
1997................................................................... 31,407
1998................................................................... 30,002
1999................................................................... 22,780
2000................................................................... 10,638
Thereafter............................................................. 10,464
--------
Total................................................................ $142,739
========
</TABLE>
Facilities Leases
The Company leases and subleases office space at various locations with
expiration dates through April 2001. In 1994, UUNET terminated its then
existing office lease in conjunction with the signing of a sublease agreement
and recorded approximately $330,000 for costs associated with lease
termination and idle equipment during the lease termination period. During
1995, the Company recorded lease termination and idle equipment costs of
approximately $1.8 million classified as general and administrative expense in
the accompanying statements of operations as a result of consolidating
substantially all of Unipalm's operations into a new facility. Rent expense
for the years ended December 31, 1993, 1994 and 1995, including lease
termination and idle equipment costs, was approximately $828,000, $1,323,000
and $3,361,000, respectively.
Future minimum annual lease payments under all operating lease and sublease
agreements as of December 31, 1995, were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- ------
<S> <C>
1996....................................... $2,599
1997....................................... 2,361
1998....................................... 2,382
1999....................................... 1,248
2000....................................... 1,109
Thereafter................................. 284
------
Total.................................... $9,983
======
</TABLE>
7. RELATED PARTY TRANSACTIONS:
In 1993, UUNET realized a loss of $433,000 on the disposition to a third
party of its investment in an affiliate. The investment in this affiliate
consisted of shares of common stock, capital contributions and loans totaling
$778,000. The disposition included agreements settling guarantees and
obligations of UUNET for the benefit of this affiliate.
At its inception, UUNET acquired the assets and liabilities of UUNET
Communications Services, Inc. ("UCS"). UUNET assumed all of the assets,
liabilities and customers of UCS in exchange for a note and a five-
F-16
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. RELATED PARTY TRANSACTIONS--(CONTINUED):
year royalty agreement. The carrying amounts of the assets and liabilities
assumed were equal to the historical book value of UCS. The agreement required
UUNET to pay UCS a royalty equal to 4% of the gross revenue billed for certain
services. Royalty expense for the years ended December 31, 1993, 1994 and
1995, was approximately $76,000, $99,000 and $55,000, respectively. In 1995,
UUNET entered into an agreement with UCS, whereby UUNET repaid all of its UCS
debt obligations and agreed upon and prepaid all of its royalty obligations to
UCS.
8. SEGMENT AND GEOGRAPHIC INFORMATION:
The Company sells its products and services in several geographic regions.
Net revenues relating to each region are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
United States.................................. $ 7,984 $ 13,989 $ 59,305
Europe......................................... 15,737 19,004 34,405
Other.......................................... 298 145 751
-------- -------- --------
$ 24,019 $ 33,138 $ 94,461
======== ======== ========
</TABLE>
A summary of net revenues, operating income (loss) and identifiable assets
by operating location is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Net revenues:
United States.............................. $ 7,895 $12,414 $ 57,375
Europe..................................... 16,124 20,724 37,086
------- ------- --------
Total net revenues....................... $24,019 $33,138 $ 94,461
======= ======= ========
Operating income (loss):
United States.............................. $(1,758) $(6,974) $ (1,300)
Europe..................................... 429 (1,252) (8,176)
Acquisition costs.......................... -- -- (11,067)
------- ------- --------
Total operating loss..................... $(1,329) $(8,226) $(20,543)
======= ======= ========
Identifiable assets:
United States.............................. $ 3,645 $12,025 $118,385
Europe..................................... 14,312 17,600 19,225
------- ------- --------
Total identifiable assets................ $17,957 $29,625 $137,610
======= ======= ========
</TABLE>
Net revenues are categorized by the location of the office from which the
sales were generated, rather than the customer's geographic location.
9. EMPLOYEE RETIREMENT PLAN:
Effective January 1, 1995, UUNET adopted a 401(k) salary deferral plan (the
"401(k) Plan"). Employees of UUNET are eligible to participate in the 401(k)
Plan when they reach age 21 and have completed half of a year of service with
UUNET. The 401(k) Plan replaced a Simplified Employee Pension ("SEP") Plan,
which
F-17
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. EMPLOYEE RETIREMENT PLAN--(CONTINUED):
allowed UUNET to make discretionary contributions. Total expense related to
the SEP Plan was approximately $165,000 and $451,000 for the years ended
December 31, 1993 and 1994, respectively; no contribution was made during
1995. UUNET matched 1% of contributions made by eligible employees in 1995
under the 401(k) Plan, which expense totaled $71,000 for the year ended
December 31, 1995.
10. INCOME TAXES:
The Company records income taxes in accordance with SFAS 109, "Accounting
for Income Taxes." The adoption of SFAS 109 by UUNET on January 1, 1993, had
no effect on the consolidated financial position or results of operations for
the year ended December 31, 1993.
The components of the benefit (provision) for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.................................... $ 15 $ -- $ --
State...................................... 2 -- --
Foreign.................................... (123) (242) 570
-------- -------- -------
Total current............................ (106) (242) 570
-------- -------- -------
Deferred:
Federal.................................... -- -- --
State...................................... -- -- --
Foreign.................................... (91) 116 (96)
-------- -------- -------
Total deferred........................... (91) 116 (96)
-------- -------- -------
Total.................................... $ (197) $ (126) $ 474
======== ======== =======
</TABLE>
Significant components of the Company's deferred tax assets (liabilities)
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------- -------
<S> <C> <C>
Net operating loss carryforwards........................ $ 2,146 $ 5,547
Accruals not currently deductible for tax purposes...... 1,753 2,351
Depreciation............................................ (646) (2,170)
Allowance for doubtful accounts......................... 76 446
------- -------
Gross deferred tax assets............................. 3,329 6,174
Valuation allowance..................................... (3,233) (6,174)
------- -------
Net deferred tax assets............................... $ 96 $ --
======= =======
</TABLE>
F-18
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES--(CONTINUED):
A reconciliation between the Company's effective tax rate and the federal
income tax rate on loss from continuing operations is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate.... (34)% (34)% (34)%
State income taxes................... (4) (4) (4)
Difference in tax rates on consoli-
dated foreign subsidiaries.......... (1) 1 2
Acquisition expense.................. -- -- 18
Losses not benefited................. 47 34 16
Other................................ 3 5 (1)
-------- -------- --------
Effective income tax rate.......... 11% 2% (3)%
======== ======== ========
</TABLE>
As of December 31, 1995, the Company had U.S. federal and foreign net
operating loss ("NOLs") of approximately $12,177,000 and $2,455,000,
respectively. The federal NOLs expire in years 2008 through 2010; foreign NOLs
may be utilized in future years to the extent of foreign income. The amount of
federal NOLs available to be used in any given year may be limited in the
event of significant changes in the ownership of UUNET. Management believes
that the prior ownership changes will not significantly limit the Company's
ability to use its NOLs. The Combined Company has fully reserved its deferred
tax assets as of December 31, 1995.
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To UUNET Technologies, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of UUNET Technologies, Inc. (a Delaware
corporation) and Subsidiaries, and have issued our report thereon dated
January 31, 1996. Our audits were made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The schedule listed in the
index to the consolidated financial statements is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required
to be set forth therein, in relation to the basic financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
January 31, 1996
F-20
<PAGE>
SCHEDULE II
UUNET TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993
Allowance for doubtful accounts.... $ 23 $ 112 $-- $ 135
Deferred tax asset valuation....... -- 726 -- 726
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts.... 135 416 (96) 455
Deferred tax asset valuation....... 726 2,507 -- 3,233
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts.... 455 2,064 (872) 1,647
Deferred tax asset valuation....... 3,233 2,941 -- 6,174
</TABLE>
F-21
<PAGE>
UUNET TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
----------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 60,424 $ 45,413
Accounts receivable, net of allowance of $1,647 and
$1,540, respectively, for doubtful accounts.......... 17,768 23,575
Inventories........................................... 1,251 1,436
Prepaid expenses and other current assets............. 2,149 3,514
-------- --------
Total current assets.................................... 81,592 73,938
Property and equipment, net............................. 54,523 75,877
Investments in affiliates............................... 1,321 6,297
Other assets............................................ 174 166
-------- --------
Total assets............................................ $137,610 $156,278
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable...................... $ 4,652 $ 6,813
Accounts payable...................................... 10,580 17,824
Accrued expenses...................................... 24,604 26,486
Deferred revenues..................................... 3,421 5,026
-------- --------
Total current liabilities............................... 43,257 56,149
Notes payable, net of current portion................... 13,686 18,045
-------- --------
Total liabilities....................................... 56,943 74,194
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value; 500 shares
authorized, none issued or outstanding............... -- --
Common Stock, $0.001 par value; 175,000 shares
authorized as of March 31, 1996; 32,057 and 32,202
shares issued and outstanding, respectively......... 32 32
Additional paid-in capital............................ 108,071 109,328
Deferred compensation................................. (165) (154)
Foreign currency translation adjustment............... 282 198
Accumulated deficit................................... (27,553) (27,320)
-------- --------
Total stockholders' equity.............................. 80,667 82,084
-------- --------
Total liabilities and stockholders' equity.............. $137,610 $156,278
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-22
<PAGE>
UUNET TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Revenues:
Internet services...................................... $ 8,815 $ 39,004
Software............................................... 6,205 4,009
--------- ---------
Total revenues....................................... 15,020 43,013
--------- ---------
Costs and expenses:
Cost of revenues--
Internet services.................................... 4,490 25,062
Software............................................. 3,557 2,391
Network operations and support......................... 2,315 5,265
Sales and marketing.................................... 3,210 6,798
General and administrative............................. 1,839 3,126
--------- ---------
Total costs and expenses............................. 15,411 42,642
--------- ---------
Income (loss) from operations............................ (391) 371
Interest income.......................................... 194 577
Interest expense......................................... (83) (329)
Equity in net loss of affiliates......................... -- (386)
--------- ---------
Income (loss) before income taxes........................ (280) 233
Benefit for income taxes................................. 17 --
--------- ---------
Net income (loss)........................................ $ (263) $ 233
========= =========
Net income (loss) per common and equivalent share
(Note 2)................................................ $ (0.01) $ 0.01
Shares used in computing net income (loss) per common and
equivalent share (Note 2)............................... 25,774 33,436
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
UUNET TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ (263) $ 233
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--
Depreciation and amortization........................ 1,025 3,948
Stock option compensation............................ 11 10
Equity in net loss of affiliates..................... -- 386
Cash provided by (used in) changes in assets and
liabilities:
Accounts receivable, net........................... (2,679) (5,675)
Inventories........................................ (446) (202)
Prepaid expenses and other current assets.......... 42 (1,451)
Accounts payable................................... 4,650 7,330
Accrued expenses................................... 1,001 2,015
Deferred revenues.................................. (963) 1,642
--------- ---------
Net cash provided by operating activities............ 2,378 8,236
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment.................... (7,363) (25,330)
Investments in affiliates.............................. -- (4,398)
--------- ---------
Net cash used in investing activities................ (7,363) (29,728)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable............................ 2,957 7,316
Repayments of notes payable............................ (291) (840)
Proceeds from sale of Preferred Stock, net............. 3,849 --
Proceeds from sale of Common Stock, net................ 38 101
--------- ---------
Net cash provided by financing activities.............. 6,553 6,577
--------- ---------
Effect of foreign currency exchange rate changes on cash
and cash equivalents.................................... 264 (96)
--------- ---------
Net increase (decrease) in cash and cash equivalents..... 1,832 (15,011)
Cash and cash equivalents, beginning of period........... 10,493 60,424
--------- ---------
Cash and cash equivalents, end of period................. $ 12,325 $ 45,413
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest................................. $ 56 $ 239
Cash paid for income taxes............................. -- --
Supplemental disclosure of noncash financing activities:
Capital lease obligations.............................. -- 110
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
UUNET Technologies, Inc., together with its wholly-owned subsidiaries
("UUNET" or the "Company"), is a leading provider of a comprehensive range of
Internet access options, applications and consulting services to businesses,
professionals and on-line services providers.
The condensed interim consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although the Company
believes that the disclosures made are adequate to make the information
presented not misleading. The condensed interim consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto, included in the Company's Annual Report on Form 10-K/A as filed
with the Securities and Exchange Commission on April 1, 1996, for the year
ended December 31, 1995.
The accompanying condensed interim consolidated financial statements have
been prepared, in all material respects, in conformity with the standards of
accounting measurements set forth in Accounting Principles Board Opinion No.
28 and reflect, in the opinion of management, all adjustments, which are of a
normal recurring nature, necessary to summarize fairly the financial position
and results of operations for such periods. The results of operations for such
interim periods are not necessarily indicative of the results to be expected
for the full year.
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents. As of March
31, 1996, the Company's cash and cash equivalents consisted of demand deposits
and money market accounts in banks and other financial institutions totaling
approximately $43.0 million and available-for-sale securities consisting of
commercial paper totaling approximately $2.4 million, which approximated
market value.
2. NET INCOME (LOSS) PER COMMON AND EQUIVALENT SHARE:
Net income (loss) per common and equivalent share is based on the weighted
average number of shares outstanding during the periods presented. Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletin No. 83, all
shares, options and warrants issued during the twelve months immediately
preceding the initial public offering were treated as if they had been
outstanding through March 31, 1995, using the treasury stock method and at a
per share price of $14.00, the initial public offering price.
Fully-diluted net income (loss) per share is not presented as it would not
materially differ from primary net income (loss) per share.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
Network and computer
equipment................ $ 58,244 $ 80,743
Furniture and office
equipment................ 6,899 8,720
Purchased software........ 1,908 2,727
Vehicles.................. 1,029 1,071
-------- --------
Property and equipment,
at cost................ 68,080 93,261
Less--Accumulated
depreciation and
amortization............. (13,557) (17,384)
-------- --------
$ 54,523 $ 75,877
======== ========
</TABLE>
F-25
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. MFS AND UUNET MERGER AGREEMENT:
On April 30, 1996, UUNET and MFS Communications Company, Inc. ("MFS")
announced that the two companies had entered into an Agreement and Plan of
Merger (the "Merger Agreement"). Under the terms of the Merger Agreement, each
share of UUNET common stock would be converted into 1.777776 shares of MFS
common stock. Consummation of the merger is subject to, among other things,
approval by the stockholders of each company and clearance under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended. Stockholders of
UUNET owning approximately 62 percent of the outstanding shares and
stockholders of MFS owning approximately 12 percent of the outstanding shares
have committed to vote in favor of the merger. The merger will be accounted
for by MFS as a purchase.
MFS is a leading provider of telecommunications services to business and
government end users. The combined company would provide a single source for a
full range of Internet, voice, data and video services through an
international network platform.
5. ACQUISITION OF UNIPALM:
On November 15, 1995, UUNET acquired Unipalm Group plc ("Unipalm"), a
provider of Internet access options, networking software, training and
consulting services in the United Kingdom and Europe. The acquisition was
accounted for as a pooling of interests and, as such, UUNET's financial
statements for the three months ended March 31, 1995 have been restated to
include the results of Unipalm. For the three month period ended March 31,
1995, UUNET had previously reported revenues of $6,482,000 as compared to
combined revenues of $15,020,000 and a net loss of $792,000 as compared to a
combined net loss of $263,000.
6. INVESTMENTS IN AFFILIATES:
During the quarter ended March 31, 1996, UUNET acquired a 40% interest in
the outstanding capital stock of EUnet Deutschland GmbH ("EUnet Germany"), a
provider of Internet access options, applications and consulting services in
Germany, for $1.6 million. The investment in EUnet Germany is accounted for
under the equity method.
On April 1, 1996, UUNET paid approximately $3.6 million in cash and issued
27,079 shares of its Common Stock with a then fair market value of
approximately $0.7 million to increase UUNET's equity ownership of UUNET
Canada, Inc. ("UUNET Canada"), from 20% to 51%. The financial statements of
UUNET Canada will be consolidated with UUNET's financial statements beginning
with the second quarter of 1996.
F-26
<PAGE>
Annex A
AGREEMENT AND PLAN
OF MERGER
DATED AS OF
APRIL 29, 1996
AMONG
MFS COMMUNICATIONS COMPANY, INC.
MFS GLOBAL INTERNET SERVICES, INC.
AND
UUNET TECHNOLOGIES, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I. THE MERGER 2
Section 1.1. The Merger........................................................ 2
Section 1.2. Effective Date of the Merger...................................... 2
ARTICLE II. THE SURVIVING CORPORATION............................................... 2
Section 2.1. Certificate of Incorporation...................................... 2
Section 2.2. By-Laws........................................................... 2
Section 2.3. Board of Directors; Officers...................................... 2
Section 2.4. Effects of Merger................................................. 3
ARTICLE III. CONVERSION OF SHARES................................................... 3
Section 3.1. Exchange Ratio.................................................... 3
Section 3.2. Parent to Make Certificates Available............................. 3
Section 3.3. Dividends; Transfer Taxes......................................... 5
Section 3.4. No Fractional Shares.............................................. 5
Section 3.5. Stock Options..................................................... 6
Section 3.6. Stockholders' Meetings............................................ 7
Section 3.7. Closing of the Company's Transfer Books........................... 8
Section 3.8. Assistance in Consummation of the Merger.......................... 8
Section 3.9. Closing........................................................... 9
Section 3.10. No Further Rights in Company Common Stock........................ 9
Section 3.11. No Liability..................................................... 9
Section 3.12. Withholding Rights............................................... 9
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF PARENT................................ 9
Section 4.1. Organization and Qualification.................................... 9
Section 4.2. Capitalization.................................................... 10
Section 4.3. Subsidiaries...................................................... 10
Section 4.4. Authority Relative to this Merger Agreement....................... 11
Section 4.5. Reports and Financial Statements.................................. 12
Section 4.6. Absence of Certain Changes or Events.............................. 13
Section 4.7. Employee Benefit Plans............................................ 13
Section 4.8. ERISA............................................................. 14
Section 4.9. Parent Action..................................................... 15
Section 4.10. Fairness Opinion................................................. 15
Section 4.11. No Brokers....................................................... 15
Section 4.12. Parent Ownership of Company Common Stock......................... 15
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................ 15
Section 5.1. Organization and Qualification.................................... 15
Section 5.2. Capitalization.................................................... 16
Section 5.3. Subsidiaries...................................................... 16
Section 5.4. Authority Relative to this Merger Agreement....................... 17
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 5.5. Reports and Financial Statements.................................. 18
Section 5.6. Absence of Certain Changes or Events.............................. 19
Section 5.7. Employee Benefit Plans............................................ 19
Section 5.8. ERISA............................................................. 20
Section 5.9. Takeover Provisions Inapplicable.................................. 20
Section 5.10. Company Action................................................... 21
Section 5.11. Fairness Opinion................................................. 21
Section 5.12. No Brokers....................................................... 21
ARTICLE VI. REPRESENTATIONS AND WARRANTIES REGARDING SUB............................ 21
Section 6.1. Organization...................................................... 21
Section 6.2. Capitalization.................................................... 21
Section 6.3. Authority Relative to this Merger Agreement....................... 22
ARTICLE VII. CONDUCT OF BUSINESS PENDING THE MERGER................................. 22
Section 7.1. Conduct of Business by the Company Pending the Merger............. 22
Section 7.2. Conduct of Business by Parent Pending the Merger.................. 26
Section 7.3. Conduct of Business of Sub........................................ 26
Section 7.4. Notice of Breach.................................................. 26
ARTICLE VIII. ADDITIONAL AGREEMENTS................................................. 26
Section 8.1. Access and Information............................................ 26
Section 8.2. Registration Statement/Proxy Statement............................ 27
Section 8.3. Compliance with the Securities Act................................ 28
Section 8.4. Listing........................................................... 28
Section 8.5. Indemnification................................................... 28
Section 8.6. HSR Act........................................................... 31
Section 8.7. Additional Agreements............................................. 31
Section 8.8. No Solicitation................................................... 32
Section 8.9. Limitation on Acquisition Activities.............................. 33
Section 8.10. Notice of Actions................................................ 33
Section 8.11. Benefit Plans Generally.......................................... 33
Section 8.12. Stockholders' Rights Plan........................................ 34
ARTICLE IX. CONDITIONS PRECEDENT.................................................... 34
Section 9.1. Conditions to Each Party's Obligation to Effect the Merger........ 34
Section 9.2. Conditions to Obligation of the Company to Effect the Merger...... 35
Section 9.3. Conditions to Obligations of Parent and Sub to Effect the Merger.. 35
ARTICLE X. TERMINATION, AMENDMENT AND WAIVER........................................ 36
Section 10.1. Termination...................................................... 36
Section 10.2. Effect of Termination............................................ 38
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Section 10.3. Amendment........................................................ 38
Section 10.4. Extension; Waivers............................................... 38
ARTICLE XI. GENERAL PROVISIONS...................................................... 38
Section 11.1. Non-Survival of Representations, Warranties and Agreements....... 38
Section 11.2. Notices.......................................................... 39
Section 11.3. Fees and Expenses................................................ 40
Section 11.4. Publicity........................................................ 41
Section 11.5. Specific Performance............................................. 41
Section 11.6. Assignment; Binding Effect....................................... 42
Section 11.7. Entire Agreement................................................. 42
Section 11.8. Governing Law.................................................... 42
Section 11.9. Counterparts..................................................... 42
Section 11.10. Headings, Table of Contents, Index of Defined Terms............. 42
Section 11.11. Interpretation.................................................. 42
Section 11.12. Waivers......................................................... 43
Section 11.13. Severability.................................................... 43
Section 11.14. Subsidiaries 43
Exhibit 1.1(a) - The Stock Option Agreement
Exhibit 1.1(b) - The Parent Voting Agreement
Exhibit 8.3(a) - The Affiliate Letter
</TABLE>
iii
<PAGE>
Index of Defined Terms
<TABLE>
<CAPTION>
<S> <C>
Acquisition Proposal............................................................... 32
Affiliate.......................................................................... 28
Certificates....................................................................... 4
Claim.............................................................................. 30
Code............................................................................... 1
Commission......................................................................... 10
Company............................................................................ 1
Company Benefit Plans.............................................................. 19
Company Common Stock............................................................... 3
Company Disclosure Letter.......................................................... 16
Company ERISA Affiliate............................................................ 20
Company Material Adverse Effect.................................................... 15
Company Meeting.................................................................... 8
Company SEC Reports................................................................ 18
DGCL............................................................................... 3
Effective Date..................................................................... 2
Encumbrances....................................................................... 10
ERISA.............................................................................. 13
Excess Shares...................................................................... 6
Exchange Act....................................................................... 12
Exchange Agent..................................................................... 3
Exchange Fund...................................................................... 4
Exchange Ratio..................................................................... 3
Form S-4........................................................................... 27
Fractional Securities Fund......................................................... 6
HSR Act............................................................................ 12
Indemnified Party.................................................................. 29
IRS................................................................................ 14
Merger............................................................................. 1
Merger Agreement................................................................... 1
MS................................................................................. 17
MS Agreement....................................................................... 17
Nasdaq............................................................................. 6
Options............................................................................ 16
Outstanding Options................................................................ 6
Parent............................................................................. 1
Parent Benefit Plans............................................................... 14
Parent Common Stock................................................................ 3
Parent Disclosure Letter........................................................... 10
Parent ERISA Affiliate............................................................. 14
Parent Material Adverse Effect..................................................... 10
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
Parent Meeting..................................................................... 8
Parent Rights Plan................................................................. 3
Parent SEC Reports................................................................. 12
Parent Share Proposal.............................................................. 8
Parent Stock Split................................................................. 3
Parent Voting Agreement............................................................ 1
Parent Voting Debt................................................................. 10
Permitted Options.................................................................. 23
Proposed Transactions.............................................................. 16
Proxy Statement/Prospectus......................................................... 27
Purchase Event..................................................................... 37
Securities Act..................................................................... 12
Share Consideration................................................................ 4
Significant Subsidiaries........................................................... 10
Stock Option Agreement............................................................. 1
Stock Option Plans................................................................. 6
Stock Purchase Plan................................................................ 7
Sub................................................................................ 1
Surviving Corporation.............................................................. 2
Voting Debt........................................................................ 16
</TABLE>
v
<PAGE>
0006426.0
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement"), dated as
----------------
of April 29, 1996, by and among MFS COMMUNICATIONS COMPANY, INC., a Delaware
corporation ("Parent"), MFS GLOBAL INTERNET SERVICES, INC., a Delaware
------
corporation and a wholly owned subsidiary of Parent ("Sub"), and UUNET
---
TECHNOLOGIES, INC., a Delaware corporation (the "Company").
-------
W I T N E S S E T H:
--------------------
WHEREAS, Parent and the Company desire to effect a business
combination (the "Merger") by means of the merger of Sub with and into the
------
Company;
WHEREAS, the Boards of Directors of Parent, Sub and the Company have
approved the Merger, upon the terms and subject to the conditions set forth
herein;
WHEREAS, as a condition and inducement to Parent's and Sub's entering
into this Merger Agreement and incurring the obligations set forth herein,
concurrently with the execution and delivery of this Merger Agreement, Parent is
entering into a Stockholder Option, Voting and Proxy Agreement with certain
stockholders of the Company, in the form of Exhibit 1.1(a) (the "Stock Option
------------
Agreement"), pursuant to which, among other things, such stockholders have
- ---------
agreed to grant Parent the irrevocable option to purchase the shares of Company
Common Stock owned by such stockholders; and agreed to vote the shares of
Company Common Stock (as defined below) owned by such stockholders in favor of
the Merger provided for herein and to grant Parent irrevocable proxies to vote
such shares of Company Common Stock;
WHEREAS, as a condition and inducement to the Company's entering into
this Merger Agreement and incurring the obligations set forth herein,
concurrently with the execution and delivery of this Merger Agreement, the
Company is entering into a Parent Voting and Proxy Agreement with certain
stockholders of Parent, in the form of Exhibit 1.1(b) (the "Parent Voting
-------------
Agreement"), pursuant to which, among other things, such stockholders have
- ---------
agreed to vote the shares of Parent Common Stock (as defined below) owned by
such stockholders in favor of the Parent Share Proposal (as defined below)
provided for herein and to grant the Company irrevocable proxies to vote such
shares of Parent Common Stock;
WHEREAS, for Federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code");
----
<PAGE>
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein, the parties hereto
agree as follows:
ARTICLE I.
THE MERGER
SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions
hereof, on the Effective Date (as defined in Section 1.2), Sub shall be merged
with and into the Company and the separate existence of Sub shall thereupon
cease, and the Company, as the surviving corporation in the Merger (the
"Surviving Corporation"), shall by virtue of the Merger continue its corporate
- ----------------------
existence under the laws of the State of Delaware.
SECTION 1.2. EFFECTIVE DATE OF THE MERGER. The Merger shall become
effective at the date and time (the "Effective Date") when a properly executed
--------- ----
Certificate of Merger is duly filed with the Secretary of State of the State of
Delaware, which filing shall be made as soon as practicable following
fulfillment of the conditions set forth in Article IX hereof, or at such time
thereafter as is provided in such Certificate.
ARTICLE II.
THE SURVIVING CORPORATION
SECTION 2.1. CERTIFICATE OF INCORPORATION. Subject to Section 8.5 of
this Merger Agreement, after the Effective Date, the Certificate of
Incorporation of the Surviving Corporation shall be amended and restated in its
entirety to read as the Certificate of Incorporation of Sub as in effect
immediately prior to the Effective Date, except that Article One shall be
amended to read as follows: "The name of the Corporation is UUNET TECHNOLOGIES,
INC."
SECTION 2.2. BY-LAWS. Subject to Section 8.5 of this Merger Agreement,
after the Effective Date, the By-laws of Sub, as in effect immediately prior to
the Effective Date, shall be the By-laws of the Surviving Corporation until
thereafter amended as provided by law, the Certificate of Incorporation of the
Surviving Corporation and such By-laws.
SECTION 2.3. BOARD OF DIRECTORS; OFFICERS. The directors of Sub
immediately prior to the Effective Date and John W. Sidgmore shall be the
directors of the Surviving Corporation and the officers of the Company
immediately prior to the Effective Date shall be the officers of the Surviving
Corporation, in each case until their respective successors are duly elected and
qualified.
2
<PAGE>
SECTION 2.4. EFFECTS OF MERGER. The Merger shall have the effects set
forth in Section 259 of the Delaware General Corporation Law (the "DGCL").
----
ARTICLE III.
CONVERSION OF SHARES
SECTION 3.1. EXCHANGE RATIO. On the Effective Date, by virtue of the
Merger and without any action on the part of any holder of any common stock,
$0.001 par value, of the Company ("Company Common Stock"):
--------------------
(a) All shares of Company Common Stock which are held by the Company or
any subsidiary of the Company, and any shares of Company Common Stock owned
by Parent, Sub or any other subsidiary of Parent, shall be canceled.
(b) Subject to Section 3.4, each remaining outstanding share of Company
Common Stock shall be converted into and represent the right to receive
1.777776, subject to adjustment pursuant to Section 3.1(c) (as may be
adjusted, the "Exchange Ratio") fully paid and nonassessable shares of the
--------------
common stock, $.01 par value, of Parent (the "Parent Common Stock"), which
-------------------
reflects the stock split of the Parent Common Stock that was paid on April
26, 1996 (the "Parent Stock Split"), together with the associated rights
------------------
under Parent's Rights Agreement, dated as of September 30, 1995, between
Parent and Continental Stock Transfer & Trust Company (the "Parent Rights
-------------
Plan").
----
(c) In the event of any stock dividend, stock split, reclassification,
recapitalization, combination or exchange of shares with respect to, or
rights issued in respect of, Parent Common Stock other than the Parent
Stock Split after the date hereof, the Exchange Ratio shall be adjusted
accordingly.
(d) Each issued and outstanding share of capital stock of Sub shall be
converted into and become one fully paid and nonassessable share of Common
Stock, $.01 par value, of the Surviving Corporation.
SECTION 3.2. PARENT TO MAKE CERTIFICATES AVAILABLE.
(e) Prior to the Effective Date, Parent shall appoint Continental Stock
Transfer and Trust Company to act as exchange agent (the "Exchange Agent")
--------------
for the Merger. At the Effective Date, Parent shall deposit with the
Exchange Agent, for the benefit of the holders of shares of Company Common
Stock, for exchange in accordance with this Article III, through the
Exchange Agent, certificates representing a number of shares of Parent
Common Stock equal to the product
3
<PAGE>
(rounded down to the nearest whole number) of the Exchange Ratio multiplied
by the number of shares of Company Common Stock outstanding immediately
prior to the Effective Date. For purposes of the Merger Agreement, shares
of Parent Common Stock, together with any dividends or distributions with
respect thereto, are hereinafter referred to as the "Exchange Fund" and
-------------
such shares of Parent Common Stock, is hereinafter referred to as the
"Share Consideration." The Exchange Agent shall deliver the Share
-------------------
Consideration out of the Exchange Fund as directed by Parent. The Share
Consideration shall be deemed to have been issued on the Effective Date.
(b) On the Effective Date, Parent shall instruct the Exchange Agent to
mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Date represented outstanding shares of
Company Common Stock (collectively, the "Certificates") whose shares were
------------
converted into the right to receive the Share Consideration pursuant to
Section 3.1(b) within three business days of receiving from the Company a
list of such holders of record, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
Parent may reasonably specify) and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for certificates representing
the Share Consideration. Upon surrender of a Certificate for cancellation
to the Exchange Agent, together with such letter of transmittal, duly
executed, and such other documents as reasonably may be required by the
Exchange Agent, and acceptance thereof by the Exchange Agent, each holder
of a Certificate shall be entitled to receive in exchange therefor
certificates representing the Share Consideration that such holder has the
right to receive pursuant to the provisions of this Article III, and the
Certificate so surrendered shall forthwith be canceled. The Exchange Agent
shall accept such Certificates upon compliance with such reasonable terms
and conditions as the Exchange Agent may impose to effect an orderly
exchange thereof in accordance with normal exchange practices. Subject to
applicable law, following surrender of any such Certificate, there shall be
paid to the record holder thereof the certificates representing the Share
Consideration and cash in consideration of fractional shares as provided in
Section 3.4.
(c) Any portion of the Exchange Fund and the Fractional Securities Fund
(as defined below) that remains undistributed to the former stockholders of
the Company for 12 months after the Effective Date shall be delivered to
Parent upon demand. Any holder of shares of Company Common
4
<PAGE>
Stock who has not exchanged his shares for Parent Common Stock in
accordance with subsection (a) within 12 months after the Effective Date
shall have no further claim upon the Exchange Agent and shall thereafter
look only to Parent for payment in respect of his shares of Company Common
Stock. Until so surrendered, certificates representing Company Common Stock
shall represent solely the right to receive the Share Consideration.
(d) Notwithstanding paragraph (b) above, all shares of Company Common
Stock subject to a right of repurchase which remains in effect following
the Merger shall continue to bear a restrictive legend with respect to such
right of repurchase and shall be delivered to Parent to hold, pending the
lapse of the right of repurchase.
SECTION 3.3. DIVIDENDS; TRANSFER TAXES. No dividends or other
distributions that are declared or made on Parent Common Stock will be paid to
persons entitled to receive certificates representing Parent Common Stock
pursuant to this Merger Agreement until such persons surrender their
Certificates representing Company Common Stock. Upon such surrender, there
shall be paid to the person in whose name the certificates representing such
Parent Common Stock shall be issued any dividends or other distributions which
shall have become payable with respect to such Parent Common Stock in respect of
a record date after the Effective Date. In no event shall the person entitled
to receive such dividends be entitled to receive interest on such dividends. In
the event that any certificates for any shares of Parent Common Stock are to be
issued in a name other than that in which the Certificates representing shares
of Company Common Stock surrendered in exchange therefor are registered, it
shall be a condition of such exchange that the Certificate or Certificates so
surrendered shall be properly endorsed or be otherwise in proper form for
transfer and that the person requesting such exchange shall pay to the Exchange
Agent any transfer or other taxes required by reason of the issuance of
certificates for such shares of Parent Common Stock in a name other than that of
the registered holder of the Certificate surrendered, or shall establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
applicable.
SECTION 3.4. NO FRACTIONAL SHARES. No certificates or scrip
representing less than one share of Parent Common Stock shall be issued upon the
surrender for exchange of Certificates representing Company Common Stock
pursuant to Section 3.1(b). In lieu of any such fractional share, each holder
of Company Common Stock who would otherwise have been entitled to a fraction of
a share of Parent Common Stock upon surrender of Certificates for exchange
pursuant to Section 3.1(b) shall be paid upon such surrender cash (without
interest) in an amount equal to such holder's proportionate interest in the net
proceeds from the sale or sales in the open market by the Exchange Agent, on
behalf of
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<PAGE>
all such holders, of the aggregate fractional Parent Common Stock
issued pursuant to this Section 3.4. As soon as practicable following the
Effective Date, the Exchange Agent shall determine the excess of (i) the number
of full shares of Parent Common Stock delivered to the Exchange Agent by Parent
over (ii) the aggregate number of full shares of Parent Common Stock to be
distributed to holders of Company Common Stock (such excess being herein called
the "Excess Shares"), and the Exchange Agent, as agent for the former holders of
-------------
Company Common Stock, shall sell the Excess Shares at the prevailing prices on
The Nasdaq Stock Market("Nasdaq"). The Exchange Agent shall deduct from the
------
proceeds of the sale of the Excess Shares all commissions and transfer taxes
incurred in connection with such sale of Excess Shares. Until the net proceeds
of such sale have been distributed to the former stockholders of the Company,
the Exchange Agent will hold such proceeds in trust for such former stockholders
(the "Fractional Securities Fund"). As soon as practicable after the
--------------------------
determination of the amount of cash to be paid to former stockholders of the
Company in lieu of any fractional interests, the Exchange Agent shall make
available in accordance with the terms of this Merger Agreement such amounts to
such former stockholders.
SECTION 3.5. STOCK OPTIONS. At or prior to the Effective Date, the
Company and Parent shall take all action necessary to cause the assumption by
Parent as of the Effective Date of the Company's 1995 Performance Option Plan,
Incentive Stock Option Plan, Equity Incentive Plan and Nonemployee Directors
Stock Option Plan (the "Stock Option Plans"). Each of the options to purchase
------------------
Company Common Stock, whether vested or unvested, issued under the Stock Option
Plans or pursuant to separate option agreements outstanding as of the Effective
Date (the "Outstanding Options") shall be converted without any action on the
-------------------
part of the holder thereof into an option to purchase shares of Parent Common
Stock as of the Effective Date. The number of shares of Parent Common Stock
that the holder of an Outstanding Option shall be entitled to receive upon the
exercise of such option shall be a number of whole shares determined by
multiplying the number of shares of Company Common Stock subject to such option,
determined immediately before the Effective Date, by the Exchange Ratio. The
option price of each share of Parent Common Stock subject to an Outstanding
Option shall be the amount (rounded up to the nearest whole cent) obtained by
dividing the exercise price per share of Company Common Stock at which such
option is exercisable immediately before the Effective Date by the Exchange
Ratio. The assumption and substitution of options as provided herein shall not
give the holders of such options additional benefits or additional vesting
rights (other than rights to the acceleration of vesting or the lapse of the
right of repurchase caused by the Merger under existing contractual
arrangements) which they did not have immediately prior to the Effective Date or
relieve the holders of any obligations or restrictions applicable to their
options or the shares obtainable
6
<PAGE>
upon exercise of the options. After the Effective Date, the Stock Option Plans
shall be continued in effect by Parent subject to amendment, modification,
suspension, abandonment or termination as provided therein, and the Stock Option
Plans as so continued shall relate only to the issuance of Parent Common Stock
as provided in this Section 3.5. Parent shall comply with the terms of the Stock
Option Plans and use all reasonable efforts to ensure, to the extent required
by, and subject to the provisions of such Stock Option Plans, that the
Outstanding Options which qualified as incentive stock options prior to the
Effective Date continue to qualify as incentive stock options after the
Effective Date. Parent shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Parent Common Stock for delivery under
Outstanding Options assumed in accordance with this Section 3.5. As soon as
practicable after the Effective Date, and not more than one business day
thereafter, Parent shall file a registration statement on Form S-8 relating to
such assumed options and shall use all reasonable efforts to maintain the
effectiveness of such registration statement (and maintain the current status of
the prospectus or prospectuses contained therein) for so long as such options
remain outstanding. Parent shall use all reasonable efforts to qualify as soon
as practicable after the Effective Date under applicable state securities laws
the issuance of such shares of Parent Common Stock issuable upon exercise of
such Outstanding Options. With respect to those individuals who subsequent to
the Merger will be subject to the reporting requirements under Section 16(a) of
the Exchange Act, Parent shall administer the Stock Option Plans assumed
pursuant to this Section 3.5 in a manner that complies with Rule 16b-3
promulgated under the Exchange Act to the extent the Stock Option Plans complied
with such rule prior to the Merger. Upon the earlier to occur of (i) July 31,
1996 or (ii) the trading day immediately preceding the Effective Date, all then
outstanding rights to acquire shares of Company Common Stock under the Company's
Employee Stock Purchase Plan (the "Stock Purchase Plan") will be exercised for
-------------------
the purchase of shares of Company Common Stock. Effective no later than the
close of the second trading day immediately preceding the Effective Date, (but
in no event prior to the exercise contemplated in the previous sentence), the
Board of Directors of the Company shall terminate the Stock Purchase Plan and
all outstanding options to purchase Company Common Stock thereunder. All funds
contributed to the Stock Purchase Plan that have not been used to purchase
shares of Company Common Stock shall be returned, in cash, to participants of
the Stock Purchase Plan as soon as administratively feasible after such
termination date, in accordance with Section 17(b) of the Stock Purchase Plan.
SECTION 3.6. STOCKHOLDERS' MEETINGS.
(a) The Company shall take all action necessary, in accordance with
applicable law and its Certificate of
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Incorporation and By-laws, to convene a special meeting of the holders of
Company Common Stock (the "Company Meeting") as promptly as practicable for
---------------
the purpose of considering and taking action upon this Merger Agreement.
The Board of Directors of the Company will recommend that holders of
Company Common Stock vote in favor of and approve the Merger and the
adoption of the Merger Agreement at the Company Meeting. The Company shall
use all reasonable efforts to solicit from its stockholders proxies in
favor of the adoption of the Merger Agreement and shall take all other
action necessary or advisable to secure the vote or consent of stockholders
required by Delaware law to obtain such approval. At the Company Meeting,
all of the shares of Company Common Stock then owned by Parent, Sub, or any
other subsidiary of Parent, or with respect to which Parent, Sub, or any
other subsidiary of Parent holds the power to direct the voting, will be
voted in favor of approval of the Merger and adoption of this Merger
Agreement.
(b) Parent shall take all action necessary, in accordance with
applicable law and its Certificate of Incorporation and By-laws, to convene
a special meeting of the holders of Parent capital stock (the "Parent
------
Meeting") as promptly as practicable for the purpose of considering and
-------
taking action to authorize the issuance of Parent Common Stock associated
with the Merger under the applicable guidelines of Nasdaq (the "Parent
------
Share Proposal"). The Board of Directors of Parent will recommend that
--------------
holders of Parent Common Stock vote in favor of and approve the Parent
Share Proposal at the Parent Meeting. Parent shall use all reasonable
efforts to solicit from its stockholders proxies in favor of the adoption
of the Parent Share Proposal and shall take all other action necessary or
advisable to secure the vote or consent of stockholders required by
Delaware law to obtain such approval.
SECTION 3.7. CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the
Effective Date, the stock transfer books of the Company shall be closed and no
transfer of shares of Company Common Stock shall be made thereafter. In the
event that, after the Effective Date, Certificates are presented to the
Surviving Corporation, they shall be canceled and exchanged for Parent Common
Stock and/or cash as provided in Sections 3.1(b) and 3.4.
SECTION 3.8. ASSISTANCE IN CONSUMMATION OF THE MERGER. Each of
Parent, Sub and the Company shall provide all reasonable assistance to, and
shall cooperate with, each other to bring about the consummation of the Merger
as soon as possible in accordance with the terms and conditions of this Merger
Agreement. Parent shall cause Sub to perform all of its obligations in
connection with this Merger Agreement.
8
<PAGE>
SECTION 3.9. CLOSING. The closing of the transactions contemplated by
this Merger Agreement shall take place (i) at the offices of Willkie Farr &
Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022,
as soon as practicable after the last of the conditions set forth in Article IX
is fulfilled or waived or (ii) at such other time and place as Parent and the
Company shall agree in writing.
SECTION 3.10. NO FURTHER RIGHTS IN COMPANY COMMON STOCK. All shares of
Parent Common Stock issued upon conversion of the shares of Company Common Stock
in accordance with the terms hereof (including any cash paid pursuant to
Sections 3.3 or 3.4) shall be deemed to have been issued in full satisfaction of
all rights pertaining to such shares of Company Common Stock.
SECTION 3.11. NO LIABILITY. Neither Parent nor the Company shall be
liable to any holder of shares of Company Common Stock for any such shares of
Company Common Stock (or dividends or distributions with respect hereto), or
cash delivered to a public official pursuant to any abandoned property, escheat
or similar law, rule, regulation, statute, order, judgment or decree.
SECTION 3.12. WITHHOLDING RIGHTS. Each of Surviving Corporation and
Parent shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Merger Agreement to any holder of shares of Company
Common Stock such amounts as it is required to deduct and withhold with respect
to the making of such payment under the Code, or any provision of state, local
or foreign tax law. To the extent that amounts are so withheld by the Surviving
Corporation or Parent, as the case may be, such withheld amounts shall be
treated for all purposes of this Merger Agreement as having been paid to the
holder of the shares of Company Common Stock in respect of which such deduction
and withholding was made by the Surviving Corporation or Parent, as the case may
be.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows:
SECTION 4.1. ORGANIZATION AND QUALIFICATION. Parent is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power to carry on its business as it is
now being conducted or currently proposed to be conducted. Parent is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities make such qualification necessary, except
where the
9
<PAGE>
failure to be so qualified will not, individually or in the aggregate,
have a material adverse effect on the business, properties, assets, condition
(financial or otherwise), liabilities or operations of Parent and its
subsidiaries taken as a whole (a "Parent Material Adverse Effect"). Complete
------------------------------
and correct copies as of the date hereof of the Certificate of Incorporation and
By-laws of Parent have been delivered to the Company as part of a disclosure
letter delivered by Parent to the Company prior to the date of this Merger
Agreement (the "Parent Disclosure Letter").
------------------------
SECTION 4.2. CAPITALIZATION. The authorized capital stock of Parent
consists of 400,000,000 shares of Parent Common Stock, and 25,000,000 shares of
preferred stock, $.01 par value. As of April 26, 1996, as adjusted for the
Parent Stock Split (i) 125,804,234 shares of Parent Common Stock were validly
issued and outstanding, fully paid and nonassessable, (ii) 95,000 shares of
Parent's Series A 8% Cumulative Convertible Preferred Stock, were validly issued
and outstanding, fully paid, and nonassessable and (iii) 15,000,000 shares of
Series B Cumulative Convertible Preferred Stock were validly issued and
outstanding, fully paid, and nonassessable. As of the date hereof, there are no
bonds, debentures, notes or other indebtedness having the right to vote on any
matters on which the Parent's stockholders may vote ("Parent Voting Debt")
------------------
issued or outstanding. As of April 26, 1996, after giving effect to the Parent
Stock Split, except for options to acquire 20,614,274 shares of Parent Common
Stock pursuant to the Parent's 1992 Stock Plan and 1993 Stock Plan, warrants to
purchase 1,500,000 shares of Parent Common Stock, commitments to issue shares of
Parent Common Stock under Parent's Shareworks and Shareworks Plus programs and
commitments to issue shares of Parent Common Stock to non-employee directors
pursuant to Parent's 1993 Stock Plan, and, except as provided herein and in the
Parent Rights Plan, there are no options, warrants, calls or other rights,
agreements or commitments presently outstanding obligating Parent to issue,
deliver or sell shares of its capital stock or debt securities, or obligating
Parent to grant, extend or enter into any such option, warrant, call or other
such right, agreement or commitment. All of the shares of Parent Common Stock
issuable in accordance with this Merger Agreement in exchange for Company Common
Stock at the Effective Date will be, when so issued, duly authorized, validly
issued, fully paid and nonassessable and shall be delivered free and clear of
any pledge, lien, security interest, mortgage, charge, claim, equity, option,
proxy, voting restriction, right of first refusal, limitation on disposition,
adverse claim of ownership or use or encumbrance of any kind ("Encumbrances"),
------------
including any preemptive rights of any stockholder of Parent.
SECTION 4.3. SUBSIDIARIES. The only "Significant Subsidiaries" (as
such term is defined in Rule 1-02 of Regulation S-X of the Securities and
Exchange Commission (the "Commission")) ("Significant Subsidiaries") of Parent
---------- ------------------------
are those named in Section
10
<PAGE>
4.3 of the Parent Disclosure Letter or set forth on Exhibit 21 to Parent's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995. Each
Significant Subsidiary incorporated in the United States is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has the corporate power to carry on its
business as it is now being conducted or currently proposed to be conducted.
Each Significant Subsidiary is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities makes
such qualification necessary except where the failure to be so qualified will
not have a Parent Material Adverse Effect. Except as disclosed in Section 4.3 of
the Parent Disclosure Letter, all the outstanding shares of capital stock of
each Significant Subsidiary are validly issued, fully paid and nonassessable and
owned by Parent or by a Significant Subsidiary of Parent free and clear of any
Encumbrances. There are no existing options, warrants, calls or other rights,
agreements or commitments of any character relating to the issued or unissued
capital stock or other securities of any of the Significant Subsidiaries of
Parent. Except as set forth in the Parent's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, as disclosed in Section 4.3 of the Parent
Disclosure Letter and except for wholly owned subsidiaries which are formed
after the date hereof in the ordinary course of business, Parent does not
directly or indirectly own any interest in any other corporation, partnership,
joint venture or other business association or entity that is a Significant
Subsidiary.
SECTION 4.4. AUTHORITY RELATIVE TO THIS MERGER AGREEMENT.
(a) Parent has the corporate power to execute and deliver this Merger
Agreement and to carry out its obligations hereunder. The execution and
delivery of this Merger Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by Parent's Board of
Directors. The Merger Agreement constitutes a valid and binding obligation
of Parent, enforceable against Parent in accordance with its terms, except
as enforcement may be limited by bankruptcy, insolvency or other similar
laws affecting the enforcement of creditors' rights generally and except
that the availability of equitable remedies, including specific
performance, is subject to the discretion of the court before which any
proceeding therefor may be brought. Except for the approval of the holders
of the Parent capital stock described in Section 3.6(b), no other corporate
proceedings on the part of Parent are necessary to authorize the execution
and delivery by Parent of this Merger Agreement or the consummation of the
transactions contemplated hereby.
11
<PAGE>
(b) The execution and delivery of this Merger Agreement and the
consummation of the transactions contemplated hereby, does not and will not
result in the change in conversion ratios, conversion rights or voting
rights, or the breach, violation, default (with or without notice or lapse
of time, or both), termination, cancellation or acceleration of any
obligation or the loss of a material benefit, under (i) the Parent's
charter or by-laws or (ii) any indenture or other loan document provision
or other contract, license, franchise, permit, order, decree, concession,
lease, instrument, judgment, statute, law, ordinance, rule or regulation
applicable to Parent or any of its subsidiaries or their respective
properties or assets, other than, in the case of clause (ii) only, (A) any
breaches, violations, defaults, terminations, cancellations, accelerations
or losses which, either singly or in the aggregate, will not have a Parent
Material Adverse Effect or prevent the consummation of the transactions
contemplated hereby and (B) the laws and regulations referred to in the
next paragraph.
(c) Except as disclosed in Section 4.4 of the Parent Disclosure Letter,
or in connection, or in compliance, with the provisions of the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the
-------
Securities Act of 1933, as amended (the "Securities Act"), the Securities
--------------
Exchange Act of 1934 (the "Exchange Act"), and the corporation, securities
------------
or blue sky laws or regulations of the various states, no filing or
registration with, or authorization, consent or approval of, any public
body or authority is necessary for the consummation by Parent of the Merger
or the other transactions contemplated by this Merger Agreement, other than
filings, registrations, authorizations, consents or approvals the failure
of which to make or obtain will not have a Parent Material Adverse Effect
or prevent the consummation of the transactions contemplated hereby.
SECTION 4.5. REPORTS AND FINANCIAL STATEMENTS. Parent has previously
furnished the Company with true and complete copies of its (i) Annual Report on
Form 10-K, as amended, for the fiscal years ended December 31, 1994 and December
31, 1995, as filed with the Commission, (ii) proxy statements related to all
meetings of its stockholders (whether annual or special) since January 1, 1994,
and (iii) all other reports or registration statements filed by Parent with the
Commission under the Exchange Act since December 31, 1992 through the date
hereof, except Quarterly Reports on Form 10-Q for fiscal quarters ended prior to
December 31, 1995 (the items in clauses (i) through (iii) being referred to
herein collectively as the "Parent SEC Reports"). As of their respective dates,
------------------
the Parent SEC Reports complied in all material respects with the requirements
of the Exchange Act, and the rules and regulations of the Commission thereunder
applicable
12
<PAGE>
to such Parent SEC Reports. As of their respective dates, the Parent SEC Reports
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements and unaudited interim
financial statements of Parent included in the Parent SEC Reports comply as to
form in all material respects with applicable accounting requirements and with
the published rules and regulations of the Commission with respect thereto. The
financial statements included in the Parent SEC Reports: have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis (except as may be indicated therein or in the notes thereto); present
fairly, in all material respects, the financial position of Parent and its
subsidiaries as at the dates thereof and the results of their operations and
cash flows for the periods then ended subject, in the case of the unaudited
interim financial statements, to normal year-end audit adjustments, any other
adjustments described therein and the fact that certain information and notes
have been condensed or omitted in accordance with the Exchange Act and the rules
promulgated thereunder; and are in all material respects, in accordance with the
books of account and records of Parent.
SECTION 4.6. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
disclosed in the Parent SEC Reports or as disclosed in Section 4.6 of the Parent
Disclosure Letter, from December 31, 1995 through the date of this Merger
Agreement, there has not been (i) any transaction, commitment, dispute or other
event or condition (financial or otherwise) of any character (whether or not in
the ordinary course of business) individually or in the aggregate having a
Parent Material Adverse Effect (other than as a result of changes in laws or
regulations of general applicability); (ii) any damage, destruction or loss,
whether or not covered by insurance, which would have a Parent Material Adverse
Effect; or (iii) any entry into any commitment or transaction material to Parent
and its subsidiaries taken as a whole (including, without limitation, any
borrowing or sale of assets) except in the ordinary course of business
consistent with past practice.
SECTION 4.7. EMPLOYEE BENEFIT PLANS. Except as disclosed in the
Parent SEC Reports or as disclosed in Section 4.7 of the Parent Disclosure
Letter, there are no material employee benefit or compensation plans, agreements
or arrangements, including "employee benefit plans," as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
-----
and including, but not limited to, plans, agreements or arrangements relating to
former employees, including, but not limited, to retiree medical plans,
maintained or contributed to by Parent or any of its subsidiaries or material
collective bargaining agreements to which Parent or any
13
<PAGE>
of its subsidiaries is a party, other than "multiemployer plans," as defined in
Section 3(37) of ERISA (together, the "Parent Benefit Plans"). To the best
--------------------
knowledge of Parent, no default exists with respect to the obligations of Parent
or any of its subsidiaries under any Parent Benefit Plan, which default, alone
or in the aggregate, would have a Parent Material Adverse Effect. Since January
1, 1995, there have been no disputes or grievances subject to any grievance
procedure, unfair labor practice proceedings, arbitration or litigation under
any Parent Benefit Plans, which have not been finally resolved, settled or
otherwise disposed of (other than claims for benefits in the ordinary course),
nor, to the best knowledge of Parent, is there any condition related to any
Parent Benefit Plans which, with notice or lapse of time or both, which failure
to resolve, settle or otherwise dispose of, alone or in the aggregate with any
other such conditions, would have a Parent Material Adverse Effect. Since
January 1, 1995, there have been no strikes, lockouts or work stoppages or
slowdowns, or to the best knowledge of Parent, jurisdictional disputes or
organizing activity occurring or threatened with respect to the business or
operations of Parent or its subsidiaries which have had or would have a Parent
Material Adverse Effect.
SECTION 4.8. ERISA. All Parent Benefit Plans have been administered
in accordance, and are in compliance with the applicable provisions of ERISA,
except where such failures to administer or comply would not have a Parent
Material Adverse Effect. Each of the Parent Benefit Plans which is intended to
meet the requirements of Section 401(a) of the Code has been determined by the
Internal Revenue Service (the "IRS") to meet the requirements of such section of
---
the Code (except with respect to any such benefit plans which have not yet been
submitted to the IRS, each of which is still within the "remedial amendment
period" described in Section 401(b) of the Code), and Parent knows of no fact
which is likely to have an adverse affect on the qualified status of such plans.
None of the Parent Benefit Plans are subject to Title IV of ERISA, and neither
Parent nor any entity treated as a single employer with Parent under Section
414(b) or (c) of the Code (a "Parent ERISA Affiliate") has maintained such a
----------------------
plan during the six-year period ended on the date hereof. To the best knowledge
of Parent, there are not now nor have there been any non-exempt "prohibited
transactions," as such term is defined in Section 4975 of the Code or Section
406 of ERISA, involving the Parent Benefit Plans which could subject Parent or
its subsidiaries to any penalty or tax imposed under Section 502(i) of ERISA or
Section 4975 of the Code other than a de minimis penalty or tax. Neither Parent
----------
nor any Parent ERISA Affiliate has any obligation to contribute to, or has had
within the six-year period ending on the date hereof, any obligation to or has
actually contributed to, any multiemployer plan. Neither Parent nor any ERISA
Affiliate has engaged in any transaction described in Section 4069 of ERISA
within the five-year period ending on the date hereof.
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SECTION 4.9. PARENT ACTION. The Board of Directors of Parent (at a
meeting duly called and held) has by the unanimous vote of all directors present
with no abstentions (a) determined that the Parent Share Proposal is advisable
and in the best interests of Parent and its stockholders and (b) recommended the
approval of the Parent Share Proposal by the holders of Parent Common Stock and
directed that the Parent Share Proposal be submitted for consideration by
Parent's stockholders at the Parent Meeting.
SECTION 4.10. FAIRNESS OPINION. Parent has received the written
opinion of Gleacher NatWest Inc., financial advisor to Parent, dated no later
than the date hereof, to the effect that the Exchange Ratio is fair to the
stockholders of Parent from a financial point of view.
SECTION 4.11. NO BROKERS. Except for Gleacher NatWest Inc., no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
or commission in connection with the Merger or the transactions contemplated by
this Merger Agreement based upon arrangements made by or on behalf of Parent.
SECTION 4.12. PARENT OWNERSHIP OF COMPANY COMMON STOCK. Parent and its
"associates" and "affiliates" (as defined under both Section 203 of the DGCL and
Rule 405 under the Securities Act), collectively beneficially own and have
beneficially owned at all times during the three-year period prior to the date
hereof less than 1% of the shares of Company Common Stock outstanding (other
than shares of Company Common Stock issuable pursuant to the Stock Option
Agreement to be entered into concurrently herewith).
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub as follows:
SECTION 5.1. ORGANIZATION AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the corporate power to carry on its business as
it is now being conducted or currently proposed to be conducted. The Company is
duly qualified as a foreign corporation to do business, and is in good standing,
in each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary, except
where the failure to be so qualified will not have a material adverse effect on
the business, properties, assets, condition (financial or otherwise),
liabilities or operations of the Company and its subsidiaries taken as a whole
(a "Company Material Adverse Effect"). Complete and correct copies as of the
-------------------------------
date hereof of
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the Certificate of Incorporation and By-laws of the Company and each of its
subsidiaries have been delivered to Parent as part of a disclosure letter
delivered by the Company to Parent on or prior to the date of this Merger
Agreement (the "Company Disclosure Letter").
-------------------------
SECTION 5.2. CAPITALIZATION. The authorized capital stock of the
Company consists of 175,000,000 shares of Company Common Stock and 500,000
shares of preferred stock, $0.001 par value. As of April 26, 1996, (i)
32,258,139 shares of Company Common Stock were validly issued and outstanding,
fully paid and nonassessable and (ii) no shares of preferred stock were issued
and outstanding. As of the date hereof, there are no bonds, debentures, notes
or other indebtedness having the right to vote on any matters on which the
Company's stockholders may vote ("Voting Debt") issued or outstanding. As of
-----------
April 26, 1996, except for (i) options to acquire 3,232,015 shares of Company
Common Stock (the "Options"), (ii) options outstanding under the Company's
-------
Employee Stock Purchase Plan, and (iii) the issuance of shares pursuant to the
proposed transactions described in Section 5.2 of the Company Disclosure Letter
(the "Proposed Transactions"), there are no options, warrants, calls or other
---------------------
rights, agreements or commitments presently outstanding obligating the Company
to issue, deliver or sell shares of its capital stock or debt securities, or
obligating the Company to grant, extend or enter into any such option, warrant,
call or other such right, agreement or commitment.
SECTION 5.3. SUBSIDIARIES. The only Significant Subsidiaries of the
Company are disclosed in Section 5.3 of the Company Disclosure Letter, all of
which have been named in the Company SEC Reports (as hereinafter defined). Each
Significant Subsidiary is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation and has the
corporate power to carry on its business as it is now being conducted or
currently proposed to be conducted. Each Significant Subsidiary incorporated in
the United States is duly qualified as a foreign corporation to do business, and
is in good standing, in each jurisdiction where the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary except where the failure to be so qualified will not
have a Company Material Adverse Effect. All the outstanding shares of capital
stock of each Significant Subsidiary are validly issued, fully paid and
nonassessable and owned by the Company or by a subsidiary of the Company free
and clear of any Encumbrances. There are no existing options, warrants, calls
or other rights, agreements or commitments of any character relating to the
issued or unissued capital stock or other securities of any of the Significant
Subsidiaries of the Company. Except as set forth in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995, as disclosed in
Section 5.3 of the Company Disclosure Letter and except for wholly owned
16
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subsidiaries which are formed after the date hereof in the ordinary course of
business, the Company does not directly or indirectly own any interest in any
other corporation, partnership, joint venture or other business association or
entity.
SECTION 5.4. AUTHORITY RELATIVE TO THIS MERGER AGREEMENT.
(a) The Company has the corporate power to execute and deliver this
Merger Agreement and to carry out its obligations hereunder and, subject to
approval of the Merger Agreement by the holders of the Company Common
Stock, to carry out its obligations hereunder. The execution and delivery
of this Merger Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by the Company's Board of
Directors. This Merger Agreement constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance
with its terms, except as enforcement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors'
rights generally and except that the availability of equitable remedies,
including specific performance, is subject to the discretion of the court
before which any proceeding therefor may be brought.
(b) Except as disclosed in Section 5.4 of the Company Disclosure Letter,
the execution and delivery of this Merger Agreement and the consummation of
the transactions contemplated hereby, does not and will not result in the
breach, violation, default (with or without notice or lapse of time, or
both), termination, cancellation or acceleration of any obligation or the
loss of a material benefit, under (i) the Company's charter or by-laws or
(ii) any indenture or other loan document provision or other contract,
license, franchise, permit, order, decree, concession, lease, instrument,
judgment, statute, law, ordinance, rule or regulation applicable to the
Company or any of its subsidiaries or their respective properties or
assets, other than, in the case of clause (ii) only, (A) any breaches,
violations, defaults, terminations, cancellations, accelerations or losses
which, either singly or in the aggregate, will not have a Company Material
Adverse Effect or prevent the consummation of the transactions contemplated
hereby and (B) the laws and regulations referred to in the next paragraph.
Contemporaneously with the execution and delivery of this Merger Agreement,
Microsoft Corporation ("MS") has delivered a written waiver of any (i) MS
--
right of first refusal or first offer contained in that certain TCP/IP
Local Access Network Agreement, dated as of March 6, 1995, by and between
MS and the Company (the "MS Agreement"), (ii) any MS right of termination
------------
of the MS Agreement, in each case as a result of the execution and
17
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delivery of this Merger Agreement and the consummation of the transactions
contemplated hereby, (iii) any MS right to declare a default under the
Equipment Loan Agreement dated as of March 6, 1996, between MS and the
Company as a result of the exercise of the rights granted under the Stock
Option Agreement or the consummation of the transactions contemplated
hereby and (iv) any MS right to have representation on the Company's Board
of Directors. In addition, contemporaneously with the execution and
delivery of this Merger Agreement, Microsoft Network L.L.C. has delivered a
written waiver of any right of termination of the TCP/IP Network Access
Provider Agreement, dated April 9, 1996, as a result of the execution and
delivery of this Merger Agreement and the consummation of the transactions
contemplated hereby.
(c) Except as disclosed in Section 5.4 of the Company Disclosure Letter
or transactions contemplated thereby in connection, or in compliance, with
the provisions of the HSR Act, the Securities Act, the Exchange Act, and
the corporation, securities or blue sky laws or regulations of the various
states, no filing or registration with, or authorization, consent or
approval of, any public body or authority is necessary for the consummation
by the Company of the Merger or the other transactions contemplated hereby,
other than filings, registrations, authorizations, consents or approvals
the failure of which to make or obtain will not have a Company Material
Adverse Effect or prevent the consummation of the transactions contemplated
hereby.
SECTION 5.5. REPORTS AND FINANCIAL STATEMENTS. The Company has
previously furnished Parent with true and complete copies of its (i) Annual
Report on Form 10-K, as amended, for the fiscal year ended December 31, 1995, as
filed with the Commission, (ii) proxy statements related to all meetings of its
stockholders (whether annual or special) since January 1, 1995, and (iii) all
other reports or registration statements filed by the Company with the
Commission under the Exchange Act since December 31, 1994, except Quarterly
Reports on Form 10-Q for fiscal quarters ended prior to December 31, 1995 (the
items in clauses (i) through (iii) being referred to herein collectively as the
"Company SEC Reports"). As of their respective dates, the Company SEC Reports
-------------------
complied in all material respects with the requirements of the Exchange Act and
the rules and regulations of the Commission thereunder applicable to such
Company SEC Reports. As of their respective dates, the Company SEC Reports did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim financial
statements of the Company included in the Company SEC Reports comply as to form
in all material respects with applicable accounting
18
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requirements and with the published rules and regulations of the Commission with
respect thereto. The financial statements included in the Company SEC Reports:
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as may be indicated therein or in the
notes thereto); present fairly, in all material respects, the financial position
of the Company and its subsidiaries as at the dates thereof and the results of
their operations and cash flow for the periods then ended subject, in the case
of the unaudited interim financial statements, to normal year-end audit
adjustments and any other adjustments described therein and the fact that
certain information and notes have been condensed or omitted in accordance with
the Exchange Act and the rules promulgated thereunder; and are in all material
respects, in accordance with the books of account and records of the Company.
SECTION 5.6. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
disclosed in the Company SEC Reports or as disclosed in Section 5.6 of the
Company Disclosure Letter, from December 31, 1995 through the date of this
Merger Agreement, there has not been (i) any transaction, commitment, dispute or
other event or condition (financial or otherwise) of any character (whether or
not in the ordinary course of business) individually or in the aggregate having
a Company Material Adverse Effect (other than as a result of changes in laws or
regulations of general applicability); (ii) any damage, destruction or loss,
whether or not covered by insurance, which would have a Company Material Adverse
Effect; or (iii) any entry into any commitment or transaction material to the
Company and its subsidiaries taken as a whole (including, without limitation,
any borrowing or sale of assets) except in the ordinary course of business
consistent with past practice.
SECTION 5.7. EMPLOYEE BENEFIT PLANS. Except as disclosed in the
Company SEC Reports or as disclosed in Section 5.7 of the Company Disclosure
Letter, there are no material employee benefit or compensation plans, agreements
or arrangements, including "employee benefit plans," as defined in Section 3(3)
of ERISA, and including, but not limited to, plans, agreements or arrangements
relating to former employees, including, but not limited, to retiree medical
plans, maintained or contributed to by the Company or any of its subsidiaries or
material collective bargaining agreements to which the Company or any of its
subsidiaries is a party, other than "multiemployer plans," as defined in Section
3(37) of ERISA (together, the "Company Benefit Plans"). To the best knowledge
---------------------
of the Company, no default exists with respect to the obligations of the Company
or any of its subsidiaries under any Company Benefit Plan, which default, alone
or in the aggregate, would have a Company Material Adverse Effect. Since
January 1, 1995, there have been no disputes or grievances subject to any
grievance procedure, unfair labor practice proceedings, arbitration or
litigation under any Company Benefit Plans, which have not been finally
resolved,
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settled or otherwise disposed of (other than claims for benefits in the ordinary
course), nor, to the best knowledge of the Company, is there any condition
related to any Company Benefit Plans which, with notice or lapse of time or
both, which failure to resolve, settle or otherwise dispose of, alone or in the
aggregate with any other such conditions, would have a Company Material Adverse
Effect. Since January 1, 1995, there have been no strikes, lockouts or work
stoppages or slowdowns, or to the best knowledge of the Company, jurisdictional
disputes or organizing activity occurring or threatened with respect to the
business or operations of the Company or its subsidiaries which have had or
would have a Company Material Adverse Effect.
SECTION 5.8. ERISA. All Company Benefit Plans have been administered
in accordance, and are in compliance with the applicable provisions of ERISA,
except where such failures to administer or comply would not have a Company
Material Adverse Effect. Each of the Company Benefit Plans which is intended to
meet the requirements of Section 401(a) of the Code has been determined by the
IRS to meet the requirements of such section of the Code (except with respect to
any such benefit plans which have not yet been submitted to the IRS, each of
which is still within the "remedial amendment period" described in Section
401(b) of the Code), and the Company knows of no fact which is likely to have an
adverse affect on the qualified status of such plans. None of the Company
Benefit Plans are subject to Title IV of ERISA, and neither the Company nor any
entity treated as a single employer with Company under Section 414(b) or (c) of
the Code (a "Company ERISA Affiliate") has maintained such a plan during the
-----------------------
six-year period ended on the date hereof. To the best knowledge of the Company,
there are not now nor have there been any non-exempt "prohibited transactions,"
as such term is defined in Section 4975 of the Code or Section 406 of ERISA,
involving the Company Benefit Plans which could subject the Company or its
subsidiaries to any penalty or tax imposed under Section 502(i) of ERISA or
Section 4975 of the Code other than a de minimis penalty or tax. Neither the
----------
Company nor any Company ERISA Affiliate has any obligation to contribute to, or
has had within the six-year period ending on the date hereof, any obligation to
or has actually contributed to, any multiemployer plan. Neither the Company nor
any Company ERISA Affiliate has engaged in any transaction described in Section
4069 of ERISA within the five-year period ending on the date hereof.
SECTION 5.9. TAKEOVER PROVISIONS INAPPLICABLE. Assuming the accuracy
of the representation of Parent set forth in Section 4.12, as of the date hereof
and at all times on or prior to the Effective Date, Section 203 of the DGCL is,
and shall be, inapplicable to the Merger and the transactions contemplated by
this Merger Agreement, the approval of the execution and delivery of the Stock
Option Agreement.
20
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SECTION 5.10. COMPANY ACTION. The Board of Directors of the Company
(at a meeting duly called and held) has by the unanimous vote of all directors
present with no abstentions (a) determined that the Merger is advisable and fair
and in the best interests of the Company and its stockholders, (b) approved the
Merger in accordance with the provisions of Section 251 of the DGCL, (c)
recommended the approval of this Merger Agreement and the Merger by the holders
of the Company Common Stock and directed that the Merger be submitted for
consideration by the Company's stockholders at the Company Meeting, (d) taken
all necessary steps to render Section 203 of the DGCL inapplicable to the Merger
and the transactions contemplated by this Merger Agreement (assuming the
accuracy of the representation of Parent set forth in Section 4.12), and (e)
adopted a resolution having the effect of causing the Company not to be subject,
to the extent permitted by applicable law, to any state takeover law that may
purport to be applicable to the Merger and the transactions contemplated by this
Merger Agreement.
SECTION 5.11. FAIRNESS OPINION. The Company has received the written
opinion of Goldman, Sachs & Co., financial advisor to the Company dated no later
than the date hereof, to the effect that the Exchange Ratio is fair to the
stockholders of the Company.
SECTION 5.12. NO BROKERS. (i) Except as set forth in Section 5.12 of
the Company Disclosure Letter and for Goldman, Sachs & Co., no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or the transactions contemplated by
this Merger Agreement based upon arrangements made by or on behalf of the
Company, and (ii) the fees and commissions payable as contemplated by this
Section 5.12.
ARTICLE VI.
REPRESENTATIONS AND WARRANTIES REGARDING SUB
Parent and Sub jointly and severally represent and warrant to the
Company as follows:
SECTION 6.1. ORGANIZATION. Sub is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Sub was incorporated on March 27, 1996. Except as related to the Merger, this
Merger Agreement and the consummation of the transactions contemplated hereby,
Sub has not engaged in any business or activities (other than certain
organizational matters) or incurred any commitments or liabilities since it was
incorporated.
SECTION 6.2. CAPITALIZATION. The authorized capital stock of Sub
consists of 1,000 shares of Common Stock, par value $0.01 per share, 100 shares
of which are validly issued and
21
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outstanding, fully paid and nonassessable and, except as disclosed in Section
6.2 of the Parent Disclosure Letter, are owned by Parent free and clear of all
Encumbrances.
SECTION 6.3. AUTHORITY RELATIVE TO THIS MERGER AGREEMENT. Sub has the
corporate power to enter into this Merger Agreement and to carry out its
obligations hereunder. The execution and delivery of this Merger Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by its Board of Directors and sole stockholder, and no other
corporate proceedings on the part of Sub are necessary to authorize this Merger
Agreement and the transactions contemplated hereby. Except as referred to
herein or in connection, or in compliance, with the provisions of the HSR Act,
the Securities Act, the Exchange Act and the corporation, securities or blue sky
laws or regulations of the various states, no filing or registration with, or
authorization, consent or approval of, any Governmental Entity is necessary for
the consummation by Sub of the Merger or the transactions contemplated by this
Merger Agreement, other than filings, registrations, authorizations, consents or
approvals the failure to make or obtain would not prevent the consummation of
the transactions contemplated hereby.
ARTICLE VII.
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 7.1. CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER.
Prior to the Effective Date, unless Parent shall otherwise agree in writing:
(a) the Company shall, and shall cause its subsidiaries to, carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, and shall, and shall
cause its subsidiaries to, use all reasonable efforts to preserve intact
their present business organizations, keep available the services of their
present officers and employees and preserve their relationships with
customers, suppliers and others having business dealings with them to the
end that their goodwill and on-going businesses shall be unimpaired at the
Effective Date, except such impairment as would not have a Company Material
Adverse Effect. The Company shall, and shall cause its subsidiaries to,
(a) maintain insurance coverages and its books, accounts and records in the
usual manner consistent with prior practices; (b) comply in all material
respects with all laws, ordinances and regulations of Governmental Entities
applicable to the Company and its subsidiaries; (c) maintain and keep its
properties and equipment in good repair, working order and condition,
ordinary wear and tear excepted; and (d) perform in all material respects
its obligations under all contracts and
22
<PAGE>
commitments to which it is a party or by which it is bound, in each case
other than where the failure to so maintain, comply or perform, either
individually or in the aggregate, would result in a Company Material
Adverse Effect;
(b) except as required by this Merger Agreement the Company shall not
and shall not propose to (A) sell or pledge or agree to sell or pledge any
capital stock owned by it in any of its subsidiaries, (B) amend its
Certificate of Incorporation or By-laws, (C) split, combine or reclassify
its outstanding capital stock, or declare, set aside or pay any dividend or
other distribution payable in cash, stock or property, or (D) directly or
indirectly redeem, purchase or otherwise acquire or agree to redeem,
purchase or otherwise acquire any shares of capital stock of the Company
except for the repurchase at cost of shares of Company Common Stock from
employees, consultants or directors of the Company upon termination of
their relationship with the Company in accordance with existing contractual
rights of repurchase in favor of the Company;
(c) the Company shall not, nor shall it permit any of its subsidiaries
to, (A) except as required by this Merger Agreement, issue, propose to
issue, deliver or sell or agree to issue, deliver or sell any additional
shares of, or rights of any kind to acquire any shares of, its capital
stock of any class, any option, rights or warrants to acquire, or
securities convertible into, shares of capital stock other than issuances
of options to purchase Company Common Stock under the Stock Option Plans on
or after the date of this Merger Agreement to employees of the Company or
its subsidiaries (including subsidiaries acquired or formed on or after the
date of this Merger Agreement) in the ordinary course of business and
consistent with past practice, other than to such employees who are
executive officers of the Company ("Permitted Options") or issuances of
-----------------
Company Common Stock pursuant to the Proposed Transactions, the Stock
Purchase Plan or the exercise of options outstanding on the date of this
Merger Agreement or Permitted Options; (B) acquire, lease or dispose or
agree to acquire, lease or dispose of any capital assets or any other
assets other than (i) in the ordinary course of business or (ii) in
connection with any additional deployment or expansion of network
infrastructure requested by MS; (C) incur additional Indebtedness or
encumber or grant a security interest in any asset or enter into any other
material transaction other than in each case (i) in the ordinary course of
business, (ii) pursuant to any extension of credit by MS, or (iii) pursuant
to credit facilities in an aggregate amount not to exceed $40,000,000; (D)
acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in, or by any other manner, any
business or any corporation, partnership,
23
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association or other business organization or division thereof, in each
case in this Clause (D) which are material, individually or in the
aggregate, to the Company and its subsidiaries taken as a whole, except
that the Company may acquire or create new wholly owned subsidiaries in the
ordinary course of business and as contemplated by the Proposed
Transactions; (E) authorize any capital expenditures in excess of the
Company's 1996 capital expenditure budget provided to Parent prior to the
date hereof, except for capital expenditures funded by an increase in
credit facilities with MS; or (F) enter into any contract, agreement,
commitment or arrangement with respect to any of the foregoing;
(d) except as disclosed in the Company Disclosure Letter, the Company
shall not, nor shall it permit, any of its subsidiaries to, except as
required to comply with applicable law and except as provided in Section
3.5 hereof, (A) adopt, enter into, terminate or amend any bonus, profit
sharing, compensation, severance, termination, stock option, pension,
retirement, deferred compensation, employment or other Company Benefit
Plan, agreement, trust, fund or other arrangement for the benefit or
welfare of any director, officer or current or former employee, other than
in the ordinary course of business consistent with past practice (B)
increase in any manner the compensation or fringe benefit of any director,
officer or employee (except for normal increases in the ordinary course of
business that are consistent with past practice and that, in the aggregate,
do not result in a material increase in benefits or compensation expense to
the Company and its subsidiaries relative to the level in effect prior to
such amendment and except for increases pursuant to the Company's pending
1996 salary increases in an aggregate amount not to exceed 15% of the base
salary of current employees, (C) pay any benefit not provided under any
existing plan or arrangement, (D) grant any awards under any bonus,
incentive, performance or other compensation plan or arrangement or Company
Benefit Plan (including, without limitation, the grant of stock options,
stock appreciation rights, stock based or stock related awards, performance
units or restricted stock, or the removal of existing restrictions in any
benefit plans or agreements or awards made thereunder) (other than such
plans and arrangements (other than stock options) which are made in the
ordinary course of business consistent with past practice, including
Permitted Options), (E) take any action to fund or in any other way secure
the payment of compensation or benefits under any employee plan, agreement,
contract or arrangement or Company Benefit Plan other than in the ordinary
course of business consistent with past practice, or (F) adopt, enter into,
amend or terminate any contract, agreement, commitment or arrangement to do
any of the foregoing;
24
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(e) except as set forth on Section 7.1(e) of the Company Disclosure
Letter, the Company shall not, nor shall it permit any of its subsidiaries
to, make any investments in non-investment grade securities exceeding
$1,000,000; provided, however, that the Company will be permitted to create
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new wholly owned subsidiaries in the ordinary course of business or
pursuant to the Proposed Transactions.
(f) the Company shall not, nor shall it permit any of its subsidiaries
to, take or cause to be taken any action (other than in the ordinary course
of business consistent with past practices), with respect to accounting
policies or procedures (including, without limitation, procedures with
respect to the payment of accounts payable and collection of accounts
receivable);
(g) the Company shall prepare and file all tax returns required to be
filed with respect to the Company and its subsidiaries (or any of them)
after the date of this Merger Agreement and on or before the Effective Date
in a timely manner, and in a manner consistent with prior years and
applicable laws and regulations other than such tax returns for which the
failure to file would not have a Company Material Adverse Effect; and
(h) the Company shall file with the Commission all reports required to
be filed under the Exchange Act on or prior to the date each such report is
due and all such reports shall comply in all material respects with the
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder applicable to such reports and, upon such filing,
shall not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. The unaudited interim financial statements of the
Company included in such reports shall comply as to form in all material
respects with applicable accounting requirements and with the published
rules and regulations of the Commission with respect thereto and shall be
prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as may be indicated therein or in the
notes thereto), shall present fairly, in all material respects, the
financial position of the Company and its subsidiaries as at the dates
thereof and the results of their operations and cash flows for the periods
then ended subject to normal year-end audit adjustments, any other
adjustments described therein and the fact that certain information and
notes shall be condensed or omitted in accordance with the Exchange Act and
the rules and regulations promulgated thereunder, and shall be in all
material respects, in accordance with the books of account and records of
the Company.
25
<PAGE>
SECTION 7.2. CONDUCT OF BUSINESS BY PARENT PENDING THE MERGER. Prior
to the Effective Date, unless the Company shall otherwise agree in writing or
except as otherwise required by this Merger Agreement, Parent shall, and shall
cause its subsidiaries to, carry on their respective businesses in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted, and shall, and shall cause its subsidiaries to, use all reasonable
efforts to preserve intact their present business organizations, keep available
the services of their present officers and employees and preserve their
relationships with customers, suppliers and others having business dealings with
them to the end that their goodwill and on-going businesses shall be unimpaired
at the Effective Date. From the date of this Merger Agreement through the
Effective Date. From the date of this Merger Agreement through the Effective
Date, Parent shall not pay or declare any dividend or make any distribution with
respect to the Parent Common Stock, other than the events contemplated by
Section 3.1(c).
SECTION 7.3. CONDUCT OF BUSINESS OF SUB. During the period from the
date of this Merger Agreement to the Effective Date, Sub shall not engage in any
activities of any nature except as provided in or contemplated by this Merger
Agreement.
SECTION 7.4. NOTICE OF BREACH. Each party shall promptly give written
notice to the other party upon becoming aware of the occurrence or, to its best
knowledge, impending or threatened occurrence, of any event which would cause or
constitute a breach of any of its representations, warranties or covenants
contained or referenced in this Merger Agreement and will use all reasonable
efforts to prevent or promptly remedy the same. Any such notification shall not
be deemed an amendment of the Company Disclosure Letter or the Parent Disclosure
Letter.
ARTICLE VIII.
ADDITIONAL AGREEMENTS
SECTION 8.1. ACCESS AND INFORMATION. Each of the Company and Parent
and their respective subsidiaries shall afford to the other and to the other's
accountants, counsel and other representatives full access during normal
business hours after reasonable notice (and at such other times as the parties
may mutually agree) throughout the period prior to the Effective Date to all of
its properties, books, contracts, commitments, records and personnel and, during
such period, each shall furnish promptly to the other (i) a copy of each report,
schedule and other document filed or received by it pursuant to the requirements
of Federal or state securities laws, and (ii) all other information concerning
its business, properties and personnel as the other may reasonably request.
Each of the Company and Parent shall hold, and shall cause their respective
employees and agents to hold, in confidence all such information
26
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in accordance with the terms of the Confidentiality Agreement dated March 5,
1996 between Parent and the Company.
SECTION 8.2. REGISTRATION STATEMENT/PROXY STATEMENT. Parent and the
Company shall cooperate and promptly prepare and Parent shall file with the
Commission as soon as practicable a Registration Statement of Form S-4 (the
"Form S-4") under the Securities Act, with respect to the Parent Common Stock
- ---------
issuable in the Merger, a portion of which Registration Statement shall also
serve as the joint proxy statement with respect to the Company Meeting and the
Parent Meeting (the "Proxy Statement/Prospectus"). The respective parties will
--------------------------
cause the Proxy Statement/Prospectus and the Form S-4 to comply as to form in
all material respects with the applicable provisions of the Securities Act, the
Exchange Act and the rules and regulations thereunder. Parent shall use all
reasonable efforts, and the Company will cooperate with Parent, to have the Form
S-4 declared effective by the Commission as promptly as practicable and to keep
the Form S-4 effective as long as is necessary to consummate the Merger. Parent
shall, as promptly as practicable, provide copies of any written comments
received from the Commission with respect to the Form S-4 to the Company and
advise the Company of any verbal comments with respect to the Form S-4 received
from the Commission. Parent shall use its best efforts to obtain, prior to the
effective date of the Form S-4, all necessary state securities law or "Blue Sky"
permits or approvals required to carry out the transactions contemplated by the
Merger Agreement and will pay all expenses incident thereto. Parent agrees that
the Proxy Statement/Prospectus and each amendment or supplement thereto at the
time of mailing thereof and at the time of the Company Meeting and the Parent
Meeting, or, in the case of the Form S-4 and each amendment or supplement
thereto, at the time it is filed or becomes effective, will not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
-------- -------
that the foregoing shall not apply to the extent that any such untrue statement
of a material fact or omission to state a material fact was made by Parent in
reliance upon and in conformity with written information concerning the Company
furnished to Parent by the Company specifically for use in the Proxy
Statement/Prospectus. The Company agrees that the written information
concerning the Company provided by it for inclusion in the Proxy
Statement/Prospectus and each amendment or supplement thereto, at the time of
mailing thereof and at the time of the Company Meeting and the Parent Meeting,
or, in the case of written information concerning the Company provided by the
Company for inclusion in the Form S-4 or any amendment or supplement thereto, at
the time it is filed or becomes effective, will not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which
27
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they were made, not misleading. No amendment or supplement to the Proxy
Statement/Prospectus will be made by Parent or the Company without the approval
of the other party. Parent will advise the Company, promptly after it receives
notice thereof, of the time when the Form S-4 has become effective or any
supplement or amendment has been filed, the issuance of any stop order, the
suspension of the qualification of Parent Common Stock issuable in connection
with the Merger for offering or sale in any jurisdiction, or any request by the
Commission for amendment of the Proxy Statement/Prospectus or the Form S-4 or
comments thereon and responses thereto or requests by the Commission for
additional information. At the effective date of the registration statement on
Form S-4, all of the Parent Common Stock to be issued in the Merger shall be
covered by such registration statement.
SECTION 8.3. COMPLIANCE WITH THE SECURITIES ACT. At least 30 days
prior to the Closing Date, the Company shall deliver to Parent a list of names
and addresses of those persons who were, in the Company's reasonable judgment,
at the record date for the Company Meeting, "affiliates" (each such person, an
"Affiliate") of the Company within the meaning of Rule 145 of the rules and
- ----------
regulations promulgated under the Securities Act. The Company shall use all
reasonable efforts to deliver or cause to be delivered to Parent, prior to the
Effective Date, from each of the Affiliates of the Company identified in the
foregoing list, an Affiliate Letter in the form attached hereto as Exhibit 8.3.
Parent shall be entitled to place legends as specified in such Affiliate Letters
on the certificates evidencing any Parent Company Common Stock to be received by
such Affiliates pursuant to the terms of the Merger Agreement, and to issue
appropriate stop transfer instructions to the transfer agent for the Parent
Company Common Stock, consistent with the terms of such Affiliate Letters.
SECTION 8.4. LISTING. Parent shall use its best efforts to include on
Nasdaq, upon official notice of issuance, the Parent Common Stock to be issued
pursuant to the Merger.
SECTION 8.5. INDEMNIFICATION.
The By-laws and the Certificate of Incorporation of the Surviving
Corporation shall be amended prior to the Effective Date to contain
provisions identical with respect to indemnification to those set forth in
the By-laws and the Certificate of Incorporation of the Company as in
effect on the date of this Merger Agreement, which provisions of the By-
laws and the Certificate of Incorporation of the Surviving Corporation
shall not be amended, repealed or otherwise modified for a period of six
years after the Effective Date in any manner that would adversely affect
the rights thereunder of individuals who immediately prior to the Effective
Date were directors, officers, agents or
28
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employees of the Company. Parent and the Surviving Corporation shall
jointly and severally indemnify, defend and hold harmless the directors,
officers and agents of the Company as provided in the Company's Certificate
of Incorporation, By-Laws or indemnification agreements, as in effect as of
the date hereof, with respect to matters occurring through the Effective
Date. Parent agrees to cause Surviving Corporation to maintain in effect
for not less than three years after the Effective Date the current policies
of directors' and officers' liability insurance maintained by the Company
with respect to matters occurring prior to the Effective Date; provided,
--------
however, that (i) the Surviving Corporation may substitute therefor
-------
policies of at least the same coverage (with carriers comparable to the
Company's existing carriers) containing terms and conditions which are no
less advantageous to the officers, directors and employees of the Company
and (ii) the Surviving Corporation shall not be required to pay an annual
premium for such insurance in excess of three times the last annual premium
paid prior to the date hereof, but in such case shall purchase as much
coverage as possible for such amount.
(b) The Company's Board of Directors has consulted with financial and
legal advisors in connection with the execution, delivery and performance
by the Company of this Merger Agreement and the approval for purposes of
Section 203 of the DGCL, the transactions contemplated by the execution and
delivery of a Stock Option Agreement by certain members of the Company's
Board of Directors or an affiliate or employer of certain members of the
Company's Board of Directors, and the Company's Board of Directors believes
that the members of the Company's Board of Directors have complied with
their fiduciary duties under Delaware law and that there is no pending or,
to the best knowledge of the Company, threatened suit, action or proceeding
against the Company or any member of the Company's Board of Directors
asserting a claim that the Company's Board of Directors or any individual
member of the Company's Board of Directors did not comply with its or his
fiduciary duties under Delaware law.
(c) In reliance upon the representations in paragraph (b), Parent
agrees to indemnify, defend and hold harmless each member of the Company's
Board of Directors that has executed and delivered, or whose affiliate or
employer has executed and delivered, a Stock Option Agreement (each an
"Indemnified Party") against any loss, claim, damage, liability or expense,
------------------
to which such Indemnified Party may become subject, insofar, but only
insofar, as such loss, claim, damage, liability or expense arises solely
out of, or is based solely upon, a claim that an Indemnified Party's
fiduciary duty as a member of the Company's Board of Directors under
Delaware law was breached by the execution
29
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and delivery by him, or his affiliate or employer, in his or its capacity
as a stockholder of the Company, of a Stock Option Agreement (a "Claim").
-----
Should a court of competent jurisdiction award damages against any
Indemnified Party without specifying the portion thereof allocable solely
to the matters referred to in the preceding sentence, the Parent and the
Company shall petition such court to make such allocation. If the court
refuses to do so, the Parent and the Company shall negotiate in good faith
to reach an agreement with respect to such allocation.
(d) Notwithstanding the provisions of paragraph (c) above, Parent
shall have no obligation to indemnify, defend and hold harmless any
Indemnified Party pursuant to paragraph (c) unless: (i) the representations
contained in paragraph (b) above are true and (ii) neither the Indemnified
Party nor any affiliate or employer of the Indemnified Party is a party to
a Claim; provided that if the Company is the beneficiary of any Claim, the
--------
amount that such Indemnified Party is entitled to receive pursuant to
paragraph (c) shall be reduced by an amount equal to the pro rata amount of
such Claim paid to the Company, indirectly attributable to the Indemnified
Party by reason of its stockholdings in the Company. In addition, Parent's
obligation to indemnify, defend and hold harmless any Indemnified Party
shall be reduced by and to the extent that (i) such Indemnified Party is
indemnified pursuant to the Company's By-laws and (ii) such Indemnified
Party is indemnified from, or receive proceeds of, any insurance policy
applicable to a Claim. Each Indemnified Party shall make any and all
claims pursuant to the Company's By-laws with respect to seeking
indemnification for a Claim and shall file any and all claims under such
insurance policy with respect to a Claim and use its reasonable efforts to
file any and all claims under such By-law provisions and insurance policy
on a timely basis. If Parent shall release an Indemnified Party from its
obligations under the Stock Option Agreement prior to the use of the Proxy
granted therein at the Company Meeting or the exercise of the option
contemplated by the Stock Option Agreement, Parent shall have no obligation
to indemnify, defend and hold harmless such Indemnified Party for loss
claim, damage, liability or expense incurred after such release.
(e) If any Claim shall be brought against an Indemnified Party,
Parent shall assume the defense thereof with counsel of its selection, and
shall have absolute discretion to settle any Claims, and each Indemnified
Party shall cooperate with the defense or settlement thereof. After Parent
has assumed the defense of such claim, Parent shall not be liable to the
Indemnified Party under this Section 8.5 for any legal or other expenses
subsequently
30
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incurred by the Indemnified Party in connection with the defense thereof.
SECTION 8.6. HSR ACT. The Company and Parent shall use their best
efforts to file as soon as practicable notifications under the HSR Act in
connection with the Merger and the transactions contemplated hereby, and to
respond as promptly as practicable to any inquiries received from the Federal
Trade Commission and the Antitrust Division of the Department of Justice for
additional information or documentation and to respond as promptly as
practicable to all inquiries and requests received from any State Attorney
General or other governmental authority in connection with antitrust matters.
SECTION 8.7. ADDITIONAL AGREEMENTS.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto agrees to use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Merger Agreement,
including using all reasonable efforts to obtain all necessary waivers,
consents and approvals, to effect all necessary registrations and filings
(including, but not limited to, filings under the HSR Act and with all
applicable Governmental Entities) and to lift any injunction or other legal
bar to the Merger (and, in such case, to proceed with the Merger as
expeditiously as possible), subject, however, in the case of the Merger
Agreement and the Parent Share Proposal, to the appropriate vote of the
stockholders of the Company and Parent. Notwithstanding the foregoing,
there shall be no action required to be taken and no action will be taken
in order to consummate and make effective the transactions contemplated by
this Merger Agreement if such action, either alone or together with another
action, would result in a Company Material Adverse Effect or a Parent
Material Adverse Effect.
(b) In case at any time after the Effective Date any further action
is necessary or desirable to carry out the purposes of this Merger
Agreement, the proper officers and/or directors of Parent, the Company and
the Surviving Corporation shall take all such necessary action.
(c) Following the Effective Date, Parent shall use its best efforts
to conduct the business, and shall cause the Surviving Corporation to use
its best efforts to conduct its business, except as otherwise contemplated
by this Merger Agreement, in a manner which would not jeopardize the
characterization of the Merger as a reorganization within the meaning of
Section 368(a) of the Code.
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SECTION 8.8. NO SOLICITATION. Neither the Company nor any of its
subsidiaries shall, directly or indirectly, take (nor shall the Company
authorize or permit its subsidiaries, officers, directors, employees,
representatives, investment bankers, attorneys, accountants or other agents or
affiliates, to take) any action to (i) encourage, solicit or initiate the
submission of any Acquisition Proposal, (ii) enter into any agreement with
respect to any Acquisition Proposal or (iii) participate in any way in
discussions or negotiations with, or furnish any information to, any person in
connection with, or take any other action to facilitate any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to lead
to, any Acquisition Proposal; provided, however, that nothing contained in this
-----------------
Merger Agreement shall prevent the Company or its Board of Directors from (A)
furnishing non-public information to, or entering into discussions with any
person or entity in connection with an unsolicited bona fide written Acquisition
Proposal by such person or entity (including a new and unsolicited Acquisition
Proposal received by the Company after the execution of this Merger Agreement
from a person or entity whose initial contact with the Company may have been
solicited by the Company prior to the execution of this Merger Agreement) if
prior to furnishing such non-public information to, or entering into discussions
or negotiations with, such person or entity, such Board of Directors receives
from such person or entity an executed confidentiality agreement or, (B)
withdrawing the Company's Board of Directors' recommendation of the Merger
Agreement, if and only to the extent that the Company's Board of Directors
believes in good faith (after consultation with and based upon the advice of its
financial advisor) that such Acquisition Proposal would, if consummated, result
in a transaction more favorable to the Company's stockholders than the Merger
and the Board of Directors of the Company determines in good faith after
consultation with and based upon a written opinion of its outside legal counsel
that such withdrawal is necessary for the directors to comply with their
fiduciary duties to the stockholders under applicable Delaware law and that such
withdrawal will not affect the validity of the submission of the Merger
Agreement to the stockholders of the Company pursuant to Delaware law or the
enforceability of the Stock Option Agreement; or (B) complying with Rule 14e-
2(a)(2) or (3) promulgated under the Exchange Act with regard to an Acquisition
Proposal. The Company will promptly communicate to Parent any solicitation by
the Company and the terms of any proposal or inquiry, including the identity of
the person and its affiliates making the same, that it may receive in respect of
any such transaction, or of any such information requested from it or of any
such negotiations or discussions being sought to be initiated with it.
"Acquisition Proposal" shall mean any proposed (A) merger, consolidation or
- ---------------------
similar transaction involving the Company, (B) sale, lease or other disposition
directly or indirectly by merger, consolidation, share exchange or otherwise of
assets of the Company or its subsidiaries representing 10% or more of the
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consolidated assets of the Company and its subsidiaries, (C) issue, sale, or
other disposition of (including by way of merger, consolidation, share exchange
or any similar transaction) securities (or options, rights or warrants to
purchase, or securities convertible into or exchangeable for, such securities)
representing 10% or more of the voting power of the Company or (D) transaction
in which any person shall acquire beneficial ownership (as such term is defined
in Rule 13d-3 under the Exchange Act), or the right to acquire beneficial
ownership or any "group" (as such term is defined under the Exchange Act) shall
have been formed which beneficially owns or has the right to acquire beneficial
ownership of 25% or more of the outstanding Company Common Stock.
SECTION 8.9. LIMITATION ON ACQUISITION ACTIVITIES. From the date of
the Merger Agreement until the Effective Date, Parent shall not participate in
any way in discussions or negotiations with, or enter into any agreement
pursuant to which Parent would acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in, or by any
other manner, any business or any corporation, partnership, association or other
business organization or division thereof, in which case either (i) the acquired
business or entity is in the business of providing Internet access, (ii) the
acquisition would involve aggregate consideration in excess of $500,000,000, or
(iii) the acquisition could reasonably be expected to delay the satisfaction of
the conditions set forth in Article IX hereof.
SECTION 8.10. NOTICE OF ACTIONS. From the date of the Merger Agreement
until the Effective Date, each party shall promptly notify the other party in
writing of any pending or, to the best knowledge of the first party, threatened
action, proceeding or investigation by any Governmental Entity or any other
person (i) challenging or seeking material damages in connection with the Merger
or the conversion of the Company Common Stock into Parent Common Stock pursuant
to the Merger or (ii) seeking to restrain or prohibit the consummation of the
Merger or otherwise limit the right of Parent or, to the best knowledge of such
party, Parent's subsidiaries to own or operate all or any portion of the
businesses or assets of the Company, which in either case is reasonably likely
to have a Company Material Adverse Effect prior to or after the Effective Date,
or a Parent Material Adverse Effect after the Effective Date.
SECTION 8.11. BENEFIT PLANS GENERALLY. Parent agrees to honor in
accordance with their terms all employment, severance and similar agreements to
which the Company or any subsidiary is a party and all accrued benefits that are
vested as of the Effective Date under any Company Benefit Plan or Stock Option
Plan, except as provided by the terms thereof. Parent agrees to provide
employees of the Company and its subsidiaries with credit for all service with
the Company or its affiliates for purposes
33
<PAGE>
of vesting and eligibility under any employee benefit plan, program or
arrangement of Parent or its affiliates, including all employee equity incentive
programs of Parent. To the extent not otherwise specified in this Merger
Agreement, Parent agrees that employees of the Company and its subsidiaries who
continue to be employed by the Company or its subsidiaries after the Effective
Date may continue to participate in their current Company sponsored employee
benefit programs through twelve months following the Effective Date. After the
Effective Date, the employees of the Company and its subsidiaries shall be
eligible to participate in the appropriate employee equity incentive programs of
Parent, as determined by Parent in its sole discretion.
SECTION 8.12. STOCKHOLDERS' RIGHTS PLAN. From the date of this Merger
Agreement until the expiration or termination of the Stock Option Agreement, the
Company shall not amend its certificate of incorporation or otherwise take
action to provide for the issuance of securities pursuant to a stockholder
rights plan or any similar program or plan.
ARTICLE IX.
CONDITIONS PRECEDENT
SECTION 9.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Date of the following
conditions:
(a) This Merger Agreement and the transactions contemplated hereby shall
have been approved and adopted by the requisite vote of the holders of the
Company Common Stock.
(b) The Parent Share Proposal shall have been approved by the requisite
vote of the holders of the Parent capital stock.
(c) The Parent Common Stock issuable in the Merger shall have been
authorized for inclusion in Nasdaq upon official notice of issuance.
(d) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(e) The Registration Statement shall have become effective in accordance
with the provisions of the Securities Act. No stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
Commission and remain in effect and all necessary approvals under state
securities laws relating to the issuance or
34
<PAGE>
trading of the Parent Common Stock to be issued to the Company stockholders
in connection with the Merger shall have been received.
(f) No preliminary or permanent injunction or other order by any Federal
or state court in the United States which prevents the consummation of the
Merger shall have been issued and remain in effect (each party agreeing to
use its best efforts to have any such injunction lifted).
SECTION 9.2. CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE
MERGER. The obligation of the Company to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Date of the additional following
conditions, unless waived by the Company:
(a) Parent and Sub shall have performed in all material respects their
agreements contained in this Merger Agreement required to be performed on
or prior to the Effective Date and the representations and warranties of
Parent and Sub contained in this Merger Agreement shall be true in all
material respects when made and on and as of the Effective Date as if made
on and as of such date (except to the extent they relate to a particular
date), and the Company shall have received a certificate of the President
or Chief Executive Officer or a Vice President of Parent and Sub to that
effect.
(b) The Company shall have received an opinion dated the Effective Date
from Heller Ehrman White & McAuliffe, counsel to the Company, that, based
upon certain factual representations of the Company, Parent and Sub
reasonably requested by such counsel, the Merger will be treated as a
reorganization within the meaning of Section 368(a).
(c) All permits, consents, authorizations, approvals, registrations,
qualifications, designations and declarations set forth in Section 4.4 of
the Parent Disclosure Letter shall have been obtained, and all filings and
notices set forth in Section 4.4 of the Parent Disclosure Letter shall have
been submitted by Parent.
(d) Parent shall have taken all action necessary to cause Mr. John W.
Sidgmore and up to two additional individuals designated by the Company and
acceptable to Parent, to become members of the Board of Directors of Parent
subject to the consummation of the Merger.
SECTION 9.3. CONDITIONS TO OBLIGATIONS OF PARENT AND SUB TO EFFECT THE
MERGER. The obligations of Parent and Sub to effect the Merger shall be subject
to the fulfillment at or prior to the Effective Date of the additional following
conditions, unless waived by Parent:
35
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(a) The Company shall have performed in all material respects its
agreements contained in this Merger Agreement required to be performed on
or prior to the Effective Date and the representations and warranties of
the Company contained in this Merger Agreement shall be true in all
material respects when made and on and as of the Effective Date as if made
on and as of such date (except to the extent they relate to a particular
date), except as contemplated or permitted by this Merger Agreement, and
Parent and Sub shall have received a certificate of the President or Chief
Executive Officer or a Vice President of the Company to that effect.
(b) Parent shall have received an opinion of counsel to Parent that, the
Merger will be treated as a reorganization within the meaning of Section
368(a) of the Code, and that the Company, Parent and Sub will each be a
party to that reorganization within the meaning of Section 368(b) of the
Code.
(c) All permits, consents, authorizations, approvals, registrations,
qualifications, designations and declarations set forth in Section 5.4 of
the Company Disclosure Letter shall have been obtained and to the extent
required to be submitted prior to the Effective Date, all filings and
notices set forth in Section 5.4 of the Company Disclosure Letter shall
have been submitted by the Company.
(d) Parent shall have received the Affiliate Letters.
ARTICLE X.
TERMINATION, AMENDMENT AND WAIVER
SECTION 10.1. TERMINATION. This Merger Agreement may be terminated at
any time prior to the Effective Date, whether before or after approval by the
stockholders of the Company:
(a) by mutual consent of the Board of Directors of Parent and the Board
of Directors of the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated on or before November 30, 1996 (provided the terminating party
is not otherwise in material breach of its representations, warranties or
obligations under this Merger Agreement);
(c) by the Company if any of the conditions specified in Sections 9.1
and 9.2 have not been met or waived by the Company at such time as such
condition is no longer capable of satisfaction;
36
<PAGE>
(d) by Parent if any of the conditions specified in Sections 9.1 and 9.3
have not been met or waived by Parent at such time as such condition is no
longer capable of satisfaction;
(e) by Parent if any of the following shall have occurred (each, a
"Purchase Event"):
---------------
(i) any person (other than Parent or any subsidiary of Parent)
shall have commenced (as such term is defined in Rule 14d-2 under the
Exchange Act), a tender offer or exchange offer to purchase any shares
of Company Common Stock such that, upon consummation of such offer,
such person would own or control 50% or more of the then outstanding
Company Common Stock, and the Board of Directors of the Company,
within ten business days after such tender or exchange offer shall
have been so commenced, fails to recommend against acceptance of such
tender or exchange offer by its stockholders, and Parent shall deliver
a written notice of termination to the Company within 20 business days
after the expiration of such 10 day period;
(ii) the Company or any subsidiary of the Company shall have
authorized, recommended, proposed or publicly announced an intention
to authorize, recommend or propose, or entered into, an agreement with
any person (other than Parent or any subsidiary of Parent) to (A)
effect a merger, consolidation or similar transaction involving the
Company or any of its material subsidiaries, (B) sell, lease or
otherwise dispose of assets of the Company or its subsidiaries
representing 10% or more of the consolidated assets of the Company and
its subsidiaries (other than in the ordinary course of business) or
(C) issue, sell or otherwise dispose of (including by way of merger,
consolidation, share exchange or any similar transaction) securities
(or options, rights or warrants to purchase, or securities convertible
into, such securities) representing 10% or more of the voting power of
the Company or any of its subsidiaries;
(iii) any person (other than Parent, any subsidiary of Parent or the
Company or any of its subsidiaries in a fiduciary capacity) shall have
acquired beneficial ownership (as such term is defined in Rule 13d-3
under the Exchange Act) or the right to acquire beneficial ownership
of, or any "group" (as such term is defined under the Exchange Act)
shall have been formed which beneficially owns or has the right to
acquire beneficial ownership of, 25% or more of the then outstanding
Company Common Stock; or
37
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(f) by either Parent or the Company if the approval of the Company's
stockholders required by Section 9.1(a) shall not have been obtained at the
Company Meeting; or
(g) by either Parent or the Company if the approval of Parent's
stockholders required by Section 9.1(b) shall not have been obtained at the
Parent Meeting.
SECTION 10.2. EFFECT OF TERMINATION. In the event of termination of
this Merger Agreement by either Parent or the Company, as provided above, this
Merger Agreement shall forthwith become void and (except for the willful breach
of this Merger Agreement by any party hereto) there shall be no liability on the
part of either the Company, Parent or Sub or their respective officers,
directors, employees or agents; provided that the last sentence of Section 8.1
--------
and Sections 8.5, 8.6, 8.12, 10.2 and Article XI (other than Section 11.4) shall
survive the termination.
SECTION 10.3. AMENDMENT. This Merger Agreement may be amended by the
parties hereto, by or pursuant to action taken by their respective Boards of
Directors, at any time before or after approval hereof by the stockholders of
the Company and Parent, but, after such approval, no amendment shall be made
which changes the ratios at which Company Common Stock is to be converted into
Parent Common Stock as provided in Section 3.1 or which in any way materially
adversely affects the rights of such stockholders, without the further approval
of such stockholders. This Merger Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
SECTION 10.4. EXTENSION; WAIVERS. At any time prior to the Effective
Date, the parties hereto, by or pursuant to action taken by their respective
Boards of Directors, may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
documents delivered pursuant hereto and (iii) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid if set forth in an
instrument in writing signed on behalf of such party.
ARTICLE XI.
GENERAL PROVISIONS
SECTION 11.1. NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. All representations and warranties set forth in the Merger
Agreement shall terminate at the Effective Date. All covenants and agreements
set forth in the Merger Agreement shall survive in accordance with their terms.
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SECTION 11.2. NOTICES. All notices or other communications under this
Merger Agreement shall be in writing and shall be given by delivery in person,
by facsimile, cable, telegram, telex or other standard form of
telecommunications, or by registered or certified mail, postage prepaid, return
receipt requested, addressed as follows (or such other address for a party as
shall be specified in a notice given in accordance with this Section 11.2) and
shall be deemed to have been given one business day after transmission by
facsimile, cable, telegram, telex or other standard form of telecommunications
or four days after deposit in the U.S. mail:
If to the Company:
UUNET Technologies, Inc.
3060 William Drive
Fairfax, Virginia 22031
Attention: John W. Sidgmore
Martina W. Knee, Esq.
Facsimile No.: (703) 206-5807
with a copy to:
Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, California 94301
Attention: August J. Moretti, Esq.
and Richard Friedman, Esq.
Facsimile No.: (415) 324-0638
If to Parent or Sub:
Prior to May 18, 1996:
MFS Communications Company, Inc.
3555 Farnam Street, 2nd Floor
Omaha, Nebraska 68131
Attention: General Counsel
Facsimile No.: (402) 977-5335
On or after May 18, 1996:
MFS Communications Company, Inc.
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Attention: General Counsel
Facsimile No.: (402) 231-3545
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With a copy to:
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: John S. D'Alimonte, Esq.
Facsimile No.: (212) 821-8111
or to such other address as any party may have furnished to the other parties in
writing in accordance with this Section.
SECTION 11.3. FEES AND EXPENSES.
(a) Whether or not the Merger is consummated, all costs and expenses
incurred in connection with this Merger Agreement and the transactions
contemplated by this Merger Agreement shall be paid by the party incurring
such expenses.
(b) If (i) Parent has terminated this Agreement pursuant to the
provisions of (A) Section 10.1(f) or (B) Section 10.1(d) as such Section
relates to Section 9.3(a) and (ii) within 18-months after the date of such
termination, the Company shall either accept, or recommend to its
stockholders for approval, an Acquisition Proposal that Parent in good
faith believes would, if consummated, result in a transaction more
favorable to the stockholders of the Company than the Merger, the Company
shall pay to Parent a fee of $60,000,000, which amount shall be payable by
wire transfer of immediately available funds within two business days after
the acquisition contemplated by such Acquisition Proposal is consummated.
The obligation of the Company pursuant to this paragraph (b) shall not be
prejudiced by an exercise of termination rights by the Company within five
business days prior to the exercise by Parent of its termination rights
under this Merger Agreement.
(c) If (i) the Company has terminated this Agreement pursuant to the
provisions of (A) Section 10.1(g) or (B) Section 10.1(c) as such Section
relates to Section 9.2(a), Parent shall:
(i) pay to the Company a fee of $60,000,000, which amount shall be
payable by wire transfer of immediately available funds within two
business days after such termination;
(ii) at the option of the Company, purchase from the Company
1,551,724 shares of Company Common Stock (as adjusted for stock
splits, reverse stock splits, stock dividends, recapitalizations and
other similar
40
<PAGE>
events) for an aggregate purchase price of $90,000,000,
which purchase shall take place on the fifth business day following
the later of (A) written notice by the Company to the Parent that a
registration statement under the Securities Act pursuant to which such
shares will be sold to the Parent has been declared effective and (B)
written notice by the Company to the Parent that the waiting period
applicable to such purchase under the HSR Act has expired or has been
terminated; and
(iii) at the option of the Company, commencing on a date to be
mutually agreed upon by the Company and Parent, but in no event later
than 180 days after notification by the Company, provide data
communications services, including private line and local special
access circuits to the Company at Parent's cost for a period of five
years, with an aggregate total value of such circuits not to exceed
$100,000,000, with no more than $25,000,000 in any calendar year, and
the cost of such services to be jointly determined by the parties or
by a mutually acceptable third-party. Parent will provide the Company
with timely network planning information regarding Parent's network
expansions and service availability.
The obligation of Parent pursuant to this paragraph (c) shall not be
prejudiced by an exercise of termination rights by Parent within five
business days prior to the exercise by the Company of its termination
rights under this Merger Agreement.
SECTION 11.4. PUBLICITY. So long as this Merger Agreement is in
effect, Parent, Sub and the Company agree to consult with each other in issuing
any press release or otherwise making any public statement with respect to the
transactions contemplated by this Merger Agreement, and none of them shall issue
any press release or make any public statement relating to the transactions
contemplated hereby prior to such consultation, except as may be required by law
or by obligations pursuant to any listing agreement with Nasdaq. The
commencement of litigation relating to the Merger Agreement or the transactions
contemplated hereby or any proceedings in connection therewith shall not be
deemed a violation of this Section 11.4.
SECTION 11.5. SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Merger Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Merger
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or
41
<PAGE>
any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
SECTION 11.6. ASSIGNMENT; BINDING EFFECT. Neither this Merger
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of law or otherwise)
without the prior written consent of the other parties, except that Sub shall
have the right to assign to Parent or any direct wholly owned subsidiary of
Parent any and all rights and obligations of Sub under this Merger Agreement.
Subject to the preceding sentence, this Merger Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns. Nothing in this Merger Agreement, expressed or implied,
except as specifically set forth in Sections 8.5 or 10.2, is intended to confer
on any person other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Merger Agreement.
SECTION 11.7. ENTIRE AGREEMENT. This Merger Agreement, the Exhibits,
the Company Disclosure Letter, the Parent Disclosure Letter, the Confidentiality
Agreement dated March 5, 1996, between the Company and Parent and any documents
delivered by the parties in connection herewith constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Merger Agreement shall be
binding upon any party hereto unless made in writing and signed by all parties
hereto.
SECTION 11.8. GOVERNING LAW. THIS MERGER AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT
REGARD TO ITS RULES OF CONFLICT OF LAWS.
SECTION 11.9. COUNTERPARTS. This Merger Agreement may be executed by
the parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a
number of copies hereof each signed by less than all, but together signed by all
of the parties hereto.
SECTION 11.10. HEADINGS, TABLE OF CONTENTS, INDEX OF DEFINED TERMS.
Headings of the Articles and Sections of this Merger Agreement, the Table of
Contents and the Index of Defined Terms are for the convenience of the parties
only, and shall be given no substantive or interpretive effect whatsoever.
SECTION 11.11. INTERPRETATION. In this Merger Agreement, unless the
context otherwise requires, words
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describing the singular number shall include the plural and vice versa, and
words denoting any gender shall include all genders and words denoting natural
persons shall include corporations and partnerships and vice versa.
SECTION 11.12. WAIVERS. Except as provided in this Merger Agreement, no
action taken pursuant to this Merger Agreement, including, without limitation,
any investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Merger Agreement. The
waiver by any party hereto of a breach of any provision hereunder shall not
operate or be construed as a waiver of any prior or subsequent breach of the
same or any other provision hereunder.
SECTION 11.13. SEVERABILITY. Any term or provision of this Merger
Agreement which is invalid or unenforceable in any jurisdiction shall, as to
that jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Merger Agreement or affecting the validity or
enforceability of any of the terms or provisions of this Merger Agreement in any
other jurisdiction. If any provision of this Merger Agreement is so broad as to
be unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.
SECTION 11.14. SUBSIDIARIES. As used in this Merger Agreement, the word
"subsidiary" when used with respect to any party means any corporation or other
organization, whether incorporated or unincorporated, of which such party
directly or indirectly owns or controls at least a majority of the securities or
other interests having by their terms ordinary voting power to elect a majority
of the board of directors or others performing similar functions with respect to
such corporation or other organization, or any organization of which such party
is a general partner.
[Signature pages follow.]
43
<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this
Merger Agreement to be executed by their respective officers thereunder duly
authorized all as of the date first written above.
MFS COMMUNICATIONS COMPANY, INC.
/s/ James Q. Crowe
-----------------------------------
Name: James Q. Crowe
Title: Chairman and CEO
MFS GLOBAL INTERNET SERVICES, INC.
/s/ James Q. Crowe
-----------------------------------
Name: James Q. Crowe
Title: President
UUNET TECHNOLOGIES, INC.
/s/ John W. Sidgmore
-----------------------------------
Name: John W. Sidgmore
Title: President and CEO
44
<PAGE>
Annex B
STOCKHOLDER OPTION, VOTING AND PROXY AGREEMENT
DATED AS OF APRIL 29, 1996
AMONG
MFS COMMUNICATIONS COMPANY, INC
MFS GLOBAL INTERNET SERVICES, INC.
AND EACH OTHER PERSON AND ENTITY
LISTED ON THE SIGNATURE PAGES HEREOF.
<PAGE>
STOCKHOLDER OPTION, VOTING AND PROXY AGREEMENT, dated as of April 29, 1996,
(this "Agreement") among MFS COMMUNICATIONS COMPANY, INC., a Delaware
---------
corporation ("Parent"), MFS GLOBAL INTERNET SERVICES, INC., a Delaware
------
corporation and a wholly owned subsidiary of Parent ("Sub"), and each other
---
person and entity listed on the signature pages hereof (each, a "Stockholder").
-----------
WHEREAS, as of the date hereof, each Stockholder owns of record the
number of shares of common stock, $0.001 par value (the "Common Stock"), of
------------
UUNET Technologies, Inc., a Delaware corporation (the "Company"), set forth
-------
opposite such Stockholder's name on Exhibit A hereto (all such shares, together
with all shares of Common Stock of the Company which are hereafter acquired by
the Stockholders, being referred to herein as the "Shares");
------
WHEREAS, Parent, Sub and the Company have entered into an Agreement
and Plan of Merger dated as of the date hereof (the "Merger Agreement";
----------------
capitalized terms used but not otherwise defined in this Agreement have the
meanings assigned to such terms in the Merger Agreement), which provides, upon
the terms and subject to the conditions set forth therein, for the merger of Sub
with and into the Company (the "Merger"); and
------
WHEREAS, as a condition to the willingness of Parent and Sub to enter
into the Merger Agreement and in furtherance of the acquisition of the Company
by Parent, Parent and Sub have required that the Stockholders agree, and in
order to induce Parent and Sub to enter into the Merger Agreement, each
Stockholder has agreed, severally and not jointly, to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and
agreements contained herein, the parties hereto agree as follows:
ARTICLE I.
GRANT OF OPTION AND EXERCISE; TRANSFER AND
VOTING OF SHARES
SECTION 1.1. GRANT OF OPTION. Subject to the terms and conditions set
forth herein, each Stockholder hereby grants to Parent an irrevocable option
(the "Option") to purchase all such Stockholder's Shares held on the date of
Option exercise for 1.777776 fully paid and nonassessable shares of Parent
Common Stock (as adjusted in the circumstances described in Section 3.1(c) of
the Merger Agreement) per Share, together with the associated rights under
Parent's Rights Agreement ("Parent Rights Plan") dated as of September 30, 1995
between Parent and Continental Stock Transfer & Trust (together, the "Purchase
Price").
<PAGE>
SECTION 1.2. EXERCISE OF OPTION. Parent may exercise the Option, in
whole with respect to all of the Shares held by all of the Stockholders covered
hereby but not in part, at any time following the occurrence of a Purchase Event
(as defined in the Merger Agreement); provided that, except as provided in the
--------
last sentence of this Section 1.2(a), the Option shall terminate and be of no
further force and effect upon the earliest to occur of (i) the Effective Date,
(ii) 20 Business Days after the termination of the Merger Agreement other than
by reason of an event described in clause (iv) or (v) below, (iii)
[INTENTIONALLY OMITTED], (iv) exercise of the Company's right to terminate the
Merger Agreement because of a breach by Parent or Sub of any covenant or
agreement set forth in the Merger Agreement or the failure of any representation
or warranty of the Parent or Sub under Article IV of the Merger Agreement or of
the Parent under Article III of this Agreement to have been true in all material
respects when made or the failure of the holders of capital stock of Parent to
approve the Merger at the Parent Meeting, (v) the Merger Agreement has been
terminated pursuant to Section 10.1(a) or (b) of the Merger Agreement, or (vi)
the failure of the Closing (defined in Section 1.3 below) to occur within 30
Business Days of the Notice Date (defined in Section 1.3 below) unless (A) the
reason for such failure relates to the inability to satisfy the conditions to
register the shares of Parent Common Stock set forth in Section 1.9 of this
Agreement or for the notification period under the HSR Act to have expired, in
either case, for reasons outside of the control of Parent, and (B) Parent is
diligently pursuing the registration of such shares with the Commission or
promptly providing all necessary information to the Federal Trade Commission and
the Antitrust Division of the Department of Justice, as the case may be.
Notwithstanding the termination of the Option, Parent shall be entitled to
purchase the Shares in accordance with the terms hereof if it has exercised the
Option prior to the termination date, unless clause (iv) or (vi) above has been
triggered in which case the rights to exercise this Option shall immediately
cease.
SECTION 1.3. CLOSING DATE. In the event Parent wishes to exercise the
Option, which may be exercised in whole with respect to all of the Shares of all
of the Stockholders covered hereby but not in part, it shall send to each
Stockholder a written notice (the date of which being herein referred to as the
"Notice Date") specifying a place and date not earlier than five business days
-----------
nor later than 10 Business Days from the Notice Date for the closing of such
purchase (the "Closing Date"); provided that if the closing of the purchase and
------------ --------
sale pursuant to the Option (the "Closing") cannot be consummated by reason of
-------
any applicable judgment, decree, order, law or regulation, the period of time
that otherwise would run pursuant to this sentence shall run instead from the
date on which such restriction on consummation has expired or been terminated;
and, provided further that, without limiting the foregoing, if prior
-------- -------
2
<PAGE>
notification to or approval of any regulatory authority is required in
connection with such purchase, Parent and, if applicable, a Stockholder shall
promptly file the required notice or application for approval and shall
expeditiously process the same (and such Stockholder shall cooperate with Parent
in the filing of any such notice or application and the obtaining of any such
approval), and the period of time that otherwise would run pursuant to this
sentence shall run instead from the date on which, as the case may be, (i) any
required notification period has expired or been terminated or (ii) such
approval has been obtained, and in either event, any requisite waiting period
has passed. Parent agrees that it shall include the issuance of shares of
Parent Common Stock under this Agreement in the notifications under the HSR Act
filed pursuant to Section 8.6 of the Merger Agreement.
SECTION 1.4. PAYMENT AND DELIVERY OF CERTIFICATES.
(a) On the Closing Date, (i) Parent will deliver to the Stockholders
the Purchase Price and a certificate signed by the President or Chief
Executive Officer of Parent to the effect that Parent and the Sub have
complied with all covenants and agreements set forth in the Merger
Agreement and that all representations and warranties of the Parent and Sub
under Article IV of the Merger Agreement and of the Parent under Article
III of this Agreement were true in all material respects when made, and
(ii) the Stockholders shall deliver to Parent certificates representing the
Shares sold by the Stockholders to Parent at the Closing, duly endorsed in
blank or accompanied by stock powers duly executed by the Stockholders in
blank, in proper form for transfer.
(b) No certificates or scrip representing less than one share of
Parent Common Stock shall be issued upon the exercise of the Option. In
lieu of any such fractional share, each Stockholder who would otherwise
have been entitled to a fraction of a share of Parent Common Stock upon
exercise of the Option shall be paid at the Closing cash (without interest)
in an amount equal to such Stockholder's fractional part of a share of
Parent Common Stock multiplied by the last reported sale price of Parent
Common Stock, as reported on the Nasdaq National Market, on the Closing
Date.
SECTION 1.5. LEGENDS.
(a) Each Stockholder shall instruct the Company to cause each
certificate of any Stockholder evidencing the Shares to bear a legend in
the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED
OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE TERMS
AND CONDITIONS OF THE STOCKHOLDER OPTION, VOTING
3
<PAGE>
AND PROXY AGREEMENT DATED AS OF APRIL 29, 1996, AS IT MAY BE AMENDED, AMONG
MFS COMMUNICATIONS COMPANY, INC., MFS GLOBAL INTERNET SERVICES, INC. AND
THE REGISTERED HOLDER OF THIS CERTIFICATE, A COPY OF WHICH IS ON FILE AT
THE PRINCIPAL EXECUTIVE OFFICES OF THE ISSUER.
(b) In the event that the Shares shall cease to be subject to the
restrictions on transfer set forth in this Agreement, the Company shall,
upon the written request of the holder thereof, issue to such holder a new
certificate evidencing such Shares without the legend required by Section
1.5(a).
SECTION 1.6. VOTING AGREEMENT. Each Stockholder hereby agrees that
from the date hereof to the earlier to occur of the termination of the Merger
Agreement or the Effective Date, at any meeting of the stockholders of the
Company, however called, and in any action by consent of the stockholders of the
Company, such Stockholder shall vote the Shares; (A) in favor of the Merger, the
Merger Agreement (as amended from time to time) and the transactions
contemplated by the Merger Agreement and (B) against any proposal for any
recapitalization, merger (other than the Merger), sale of assets or other
business combination between the Company and any person or entity (other than
Parent or Sub) or any other action or agreement that would result in a breach of
any covenant, representation or warranty or any other obligation or agreement of
the Company under the Merger Agreement or which would result in any of the
conditions to the Merger Agreement not being fulfilled.
SECTION 1.7. NO DISPOSITION OR ENCUMBRANCE OF SHARES AND OPTIONS.
Except to the extent set forth in Exhibit A, each Stockholder hereby covenants
and agrees that, from the date hereof to the termination of the rights of Parent
under Sections 1.2, 1.6 and 1.8 of this Agreement, it shall not, and shall not
offer or agree to, sell, transfer, tender, assign, hypothecate or otherwise
dispose of, or create or permit to exist any Encumbrance (as hereinafter
defined) on the Shares owned by such Stockholder at any time prior to the
Effective Date.
SECTION 1.8. VOTING OF SHARES; FURTHER ASSURANCES.
(a) Each Stockholder, by this Agreement, with respect to its Shares,
does hereby constitute and appoint Sub and Parent, or any nominee of Sub
and Parent, with full power of substitution, from the date hereof to the
earlier to occur of the termination of the Merger Agreement or the
Effective Date, as its true and lawful attorney and proxy (its "Proxy"),
-----
for and in its name, place and stead, to vote each of such Shares as its
Proxy, at every annual, special or adjourned meeting of the stockholders of
the Company, including the right to sign its name (as stockholder) to any
consent, certificate or other document relating to the
4
<PAGE>
Company that the law of the State of Delaware may permit or require:
(i) in favor of the Merger, the Merger Agreement (as amended
from time to time) and the transactions contemplated by the Merger
Agreement; and
(ii) against any proposal for any recapitalization, merger
(other than the Merger), sale of assets or other business combination
between the Company and any person or entity (other than Parent or
Sub) or any other action or agreement that would result in a breach of
any covenant, representation or warranty or any other obligation or
agreement of the Company under the Merger Agreement or which could
result in any of the conditions to the Merger Agreement not being
fulfilled.
THIS POWER OF ATTORNEY IS IRREVOCABLE, IS GRANTED IN CONSIDERATION OF
PARENT AND SUB ENTERING INTO THE MERGER AGREEMENT AND IS COUPLED WITH AN
INTEREST SUFFICIENT IN LAW TO SUPPORT AN IRREVOCABLE POWER. This
appointment shall revoke all prior attorneys and proxies appointed by any
Stockholder at any time with respect to the Shares and no subsequent
attorneys or proxies will be appointed by such Stockholder, or be
effective, with respect thereto during the term of this Agreement.
(b) Each Stockholder shall perform such further acts and execute such
further documents and instruments as may reasonably be required to vest in
Sub and Parent the power to carry out and give effect to the provisions of
this Agreement.
SECTION 1.9. REGISTRATION. Notwithstanding anything in this Agreement
------------
to the contrary, the obligation of the Stockholders to transfer their Shares to
Parent at the Closing shall be conditioned upon the issuance of Parent Common
Stock to the Stockholders being registered pursuant to the Securities Act at the
Closing. Parent shall include such issuance of shares of Parent Common Stock in
the Registration Statement on Form S-4 being filed pursuant to the Merger
Agreement.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
Each Stockholder, severally and not jointly, hereby represents and
warrants to Parent as follows:
SECTION 2.1. DUE ORGANIZATION, AUTHORIZATION, ETC. Such Stockholder
(if it is a corporation, partnership or other legal entity) is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation
5
<PAGE>
or organization. Such Stockholder has all requisite power (corporate or
otherwise) to execute and deliver this Agreement, to grant the Option and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement, the appointment of Parent and Sub as such Stockholder's Proxy,
the granting of the Option and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary action (corporate or
otherwise) on the part of such Stockholder. This Agreement has been duly
executed and delivered by or on behalf of such Stockholder and, assuming its due
authorization, execution and delivery by Parent, constitutes a legal, valid and
binding obligation of such Stockholder, enforceable against such Stockholder in
accordance with its terms.
SECTION 2.2. NO CONFLICTS, REQUIRED FILINGS AND CONSENTS.
(a) Except as disclosed on Exhibit A, the execution and delivery of this
Agreement by such Stockholder do not, and the performance of this Agreement
by such Stockholder will not, (i) conflict with or violate the Certificate
of Incorporation by By-Laws or other similar organizational documents of
such Stockholder (in the case of a Stockholder that is a corporation,
partnership or other legal entity), (ii) conflict with or violate any
statute, law, ordinance, rule, regulation, order, decree or judgment
applicable to such Stockholder or by which it or any of its properties is
bound or affected, or (iii) result in any breach of or constitute a default
(with notice or lapse of time, or both) under, or give to others any rights
of termination, amendment, acceleration or cancellation of, or result in
the creation of a lien or encumbrance on any of the property or assets of
such Stockholder or (if such Stockholder is a corporation, partnership or
other legal entity) any of its subsidiaries, including, without limitation,
the Shares, pursuant to, any indenture or other loan document provision or
other contract, license, franchise, permit or other instrument or
obligation to which such Stockholder is a party or by which such
Stockholder or any of its properties is bound or affected, except, in the
case of clauses (ii) and (iii), for any such breaches, defaults or other
occurrences that would not prevent or delay the performance by such
Stockholder of its obligations under this Agreement.
(b) The execution and delivery of this Agreement by such Stockholder do
not, and the performance of this agreement by such Stockholder will not,
require any consent, approval, authorization or permit of, or filing with
or notification to, any governmental or regulatory authority, domestic or
foreign, except where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would
not prevent or delay
6
<PAGE>
the performance by the Stockholder of its obligations under this Agreement.
SECTION 2.3. TITLE TO SHARES. Such Stockholder has, and the transfer
by the Stockholder of the Shares hereunder will pass, good and marketable title
to the Shares listed on Exhibit A hereto, free and clear of any pledge, lien,
security interest, mortgage, charge, claim, equity, option, proxy, voting
restriction, right of first refusal, limitation on disposition, adverse claim of
ownership or use or encumbrance of any kind ("Encumbrances"), except to the
------------
extent disclosed on Exhibit A and for Shares sold prior to the Closing as
permitted under Section 1.7.
SECTION 2.4. NO BROKERS. Except for Goldman, Sachs & Co. or as set
forth in the Company Disclosure Letter, no broker, finder or investment banker
is entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of such Stockholder.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to each Stockholder as follows:
SECTION 3.1 ORGANIZATION AND QUALIFICATION. Parent is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power to carry on its business as it is
now being conducted or currently proposed to be conducted. Parent is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities make such qualification necessary, except
where the failure to be so qualified will not, individually or in the aggregate,
have a material adverse effect on the business, properties, assets, condition
(financial or otherwise), liabilities or operations of Parent and its
subsidiaries taken as a whole (a "Parent Material Adverse Effect"). Complete
------------------------------
and correct copies as of the date hereof of the Certificate of Incorporation and
By-laws of Parent have been delivered to the Company as part of a disclosure
letter delivered by Parent to the Company on or prior to the date of this
Agreement pursuant to the Merger Agreement (the "Parent Disclosure Letter").
--------------------------
SECTION 3.2 CAPITALIZATION. The authorized capital stock of Parent
consists of 400,000,000 shares of Parent Common Stock, and 25,000,000 shares of
preferred stock, $.01 par value. As of April 26, 1996 (after giving effect to
the stock split on that day), (i) 125,804,234 shares of Parent Common Stock were
validly issued and outstanding, fully paid and nonassessable,
7
<PAGE>
(ii) 95,000 shares of Parent's Series A 8% Cumulative Convertible Preferred
Stock, were validly issued and outstanding, fully paid, and nonassessable and
(iii) 15,000,000 shares of Series B Cumulative Convertible Preferred Stock were
validly issued and outstanding, fully paid, and nonassessable. As of the date
hereof, there are no bonds, debentures, notes or other indebtedness having the
right to vote on any matters on which the Parent's stockholders may vote
("Parent Voting Debt") issued or outstanding. As of April 26, 1996 (after giving
------------------
effect to the stock split on that day), except for options to acquire 20,614,274
shares of Parent Common Stock pursuant to the Parent's 1992 Stock Plan and 1993
Stock Plan, warrants to purchase 1,500,000 shares of Parent Common Stock,
commitments to issue shares of Parent Common Stock under Parent's Shareworks and
Shareworks Plus programs and commitments to issue shares of Parent Common Stock
to non-employee directors pursuant to Parent's 1993 Stock Plan, and, except as
provided herein and in the Parent Rights Plan, there are no options, warrants,
calls or other rights, agreements or commitments presently outstanding
obligating Parent to issue, deliver or sell shares of its capital stock or debt
securities, or obligating Parent to grant, extend or enter into any such option,
warrant, call or other such right, agreement or commitment. All of the shares of
Parent Common Stock issuable in accordance with this Agreement in exchange for
Company Common Stock at the Closing will be, when so issued, duly authorized,
validly issued, fully paid and nonassessable and shall be delivered free and
clear of any pledge, lien, security interest, mortgage, charge, claim, equity,
option, proxy, voting restriction, right of first refusal, limitation on
disposition, adverse claim of ownership or use or encumbrance of any kind
("Encumbrances"), including any preemptive rights of any stockholder
------------
of Parent.
SECTION 3.3 SUBSIDIARIES. The only "Significant Subsidiaries" (as
such term is defined in Rule 1-02 of Regulation S-X of the Securities and
Exchange Commission (the "Commission")) ("Significant Subsidiaries") of Parent
---------- ------------------------
are those named in Section 4.3 of the Parent Disclosure Letter or set forth on
Exhibit 22 to Parent's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. Each Significant Subsidiary incorporated in the United
States is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and has the corporate power
to carry on its business as it is now being conducted or currently proposed to
be conducted. Each Significant Subsidiary is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary except where the failure to be so
qualified will not have a Parent Material Adverse Effect. Except as disclosed
in Section 4.3 of the Parent Disclosure Letter, all the outstanding shares of
capital stock of each Significant Subsidiary are validly issued, fully paid and
nonassessable and owned by Parent or by a Significant Subsidiary of Parent free
and
8
<PAGE>
clear of any Encumbrances. There are no existing options, warrants, calls
or other rights, agreements or commitments of any character relating to the
issued or unissued capital stock or other securities of any of the Significant
Subsidiaries of Parent. Except as set forth in the Parent's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, as disclosed in Section
4.3 of the Parent Disclosure Letter and except for wholly owned subsidiaries
which are formed after the date hereof in the ordinary course of business,
Parent does not directly or indirectly own any interest in any other
corporation, partnership, joint venture or other business association or entity
that is a Significant Subsidiary.
SECTION 3.4 AUTHORITY RELATIVE TO THE AGREEMENT.
(a) Parent has the corporate power to execute and deliver this
Agreement and to carry out its obligations hereunder. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by Parent's Board of
Directors. The Agreement constitutes a valid and binding obligation of
Parent, enforceable against Parent in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and except that
the availability of equitable remedies, including specific performance, is
subject to the discretion of the court before which any proceeding therefor
may be brought. No other corporate proceedings on the part of Parent are
necessary to authorize the execution and delivery by Parent of this
Agreement or the consummation of the transactions contemplated hereby.
(b) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby, does not and will not result in
the change in conversion ratios, conversion rights or voting rights, or the
breach, violation, default (with or without notice or lapse of time, or
both), termination, cancellation or acceleration of any obligation, or the
loss of a material benefit, under (i) the Parent's charter or by-laws or
(ii) any indenture or other loan document provision or other contract,
license, franchise, permit, order, decree, concession, lease, instrument,
judgment, statute, law, ordinance, rule or regulation applicable to Parent
or any of its subsidiaries or their respective properties or assets, other
than, in the case of clause (ii) only, (A) any breaches, violations,
defaults, terminations, cancellations, accelerations or losses which,
either singly or in the aggregate, will not have a Parent Material Adverse
Effect or prevent the consummation of the transactions contemplated hereby
and (B) the laws and regulations referred to in the next paragraph.
9
<PAGE>
(c) Except as disclosed in Section 4.4 of the Parent Disclosure
Letter, or in connection, or in compliance, with the provisions of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
---
Act"), the Securities Act of 1933, as amended (the "Securities Act"), the
--- --------------
Securities Exchange Act of 1934 (the "Exchange Act"), and the corporation,
------------
securities or blue sky laws or regulations of the various states, no filing
or registration with, or authorization, consent or approval of, any public
body or authority is necessary for the consummation by Parent of the
transactions contemplated by this Agreement, other than filings,
registrations, authorizations, consents or approvals the failure of which
to make or obtain will not have a Parent Material Adverse Effect or prevent
the consummation of the transactions contemplated hereby.
SECTION 3.5 REPORTS AND FINANCIAL STATEMENTS. Parent has previously
furnished the Company with true and complete copies of its (i) Annual Report on
Form 10-K, as amended, for the fiscal years ended December 31, 1994 and December
31, 1995, as filed with the Commission, (ii) proxy statements related to all
meetings of its stockholders (whether annual or special) since January 1, 1994,
and (iii) all other reports or registration statements filed by Parent with the
Commission under the Exchange Act since December 31, 1992 through the date
hereof, except Quarterly Reports on Form 10-Q for fiscal quarters ended prior to
December 31, 1995 (the items in clauses (i) through (iii) being referred to
herein collectively as the "Parent SEC Reports"). As of their respective dates,
------------------
the Parent SEC Reports complied in all material respects with the requirements
of the Exchange Act, and the rules and regulations of the Commission thereunder
applicable to such Parent SEC Reports. As of their respective dates, the Parent
SEC Reports did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited consolidated financial statements and unaudited
interim financial statements of Parent included in the Parent SEC Reports comply
as to form in all material respects with applicable accounting requirements and
with the published rules and regulations of the Commission with respect thereto.
The financial statements included in the Parent SEC Reports: have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis (except as may be indicated therein or in the notes thereto);
present fairly, in all material respects, the financial position of Parent and
its subsidiaries as at the dates thereof and the results of their operations and
cash flows for the periods then ended subject, in the case of the unaudited
interim financial statements, to normal year-end audit adjustments, any other
adjustments described therein and the fact that certain information and notes
have been condensed or omitted in accordance with the Exchange Act and the rules
promulgated
10
<PAGE>
thereunder; and are in all material respects, in accordance with the books of
account and records of Parent.
SECTION 3.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
disclosed in the Parent SEC Reports or as disclosed in Section 4.6 of the Parent
Disclosure Letter, from December 31, 1995 through the date of this Agreement,
there has not been (i) any transaction, commitment, dispute or other event or
condition (financial or otherwise) of any character (whether or not in the
ordinary course of business) individually or in the aggregate having a Parent
Material Adverse Effect (other than as a result of changes in laws or
regulations of general applicability); (ii) any damage, destruction or loss,
whether or not covered by insurance, which would have a Parent Material Adverse
Effect; or (iii) any entry into any commitment or transaction material to Parent
and its subsidiaries taken as a whole (including, without limitation, any
borrowing or sale of assets) except in the ordinary course of business
consistent with past practice.
ARTICLE IV.
ADJUSTMENTS
SECTION 4.1. DISTRIBUTIONS; ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
(a) Any dividends or other distributions (whether payable in cash, stock
or otherwise) by the Company with respect to any Shares purchased hereunder
with a record date on or after the Closing Date will belong to Parent. If
any such dividend or distribution belonging to Parent is paid by the
Company to the Stockholder, the Stockholder shall hold such dividend or
distribution in trust for the benefit of Parent and shall promptly remit
such dividend or distribution to Parent in exactly the form received,
accompanied by appropriate instruments of transfer.
(b) If on or after the date of this Agreement there shall occur any
stock dividend, stock split, recapitalization, combination or exchange of
shares, merger, consolidation, reorganization or other change or
transaction of or by the Company, as a result of which shares of any class
of stock, other securities, cash or other property shall be issued in
respect of any Shares or if any Shares shall be changed into the same or
another class of stock or other securities, then, upon exercise of the
Option, Parent shall receive for the aggregate price payable upon exercise
of the Option with respect to the Shares, all such shares of stock, other
securities, cash or other property issued, delivered or received with
respect to such Shares (or if the Option shall not be exercised,
appropriate adjustment shall be made for purposes of the calculations set
forth in this Agreement).
11
<PAGE>
ARTICLE V.
SECTION 5.1. NO SOLICITATION OF TRANSACTIONS.
Each Stockholder covenants and agrees that in its capacity as a
stockholder of the Company it shall not, directly or indirectly, take (nor shall
the Stockholder authorize or permit its officers, directors, partners,
stockholders, employees, representatives, investment bankers, attorneys,
accountants or other agents or affiliates (the "Representatives"), to take and
---------------
the Representatives shall not take, on behalf of the Stockholder) any action to
(i) encourage, solicit or initiate the submission of any Acquisition Proposal or
a proposal for the acquisition, purchase or option to purchase any of the
Shares, (ii) enter into any agreement with respect to any Acquisition Proposal
or any acquisition or purchase of all or any of the Shares or (iii) participate
in any way in discussions or negotiations with, or furnish any information to,
any person in connection with, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Acquisition Proposal or a proposal to acquire or
purchase any of the Shares. The Stockholder will promptly communicate to Parent
any solicitation received by it in its capacity as a stockholder of the Company
with respect to an Acquisition Proposal and the terms of such proposal or
inquiry, including the identity of the person and its affiliates making the
same, that it may receive in respect of any such transaction, or of any such
information requested from it or of any such negotiations or discussions being
sought to be initiated with it. "Acquisition Proposal" shall mean any proposed
--------------------
(A) merger, consolidation or similar transaction involving the Company, (B)
sale, lease or other disposition directly or indirectly by merger,
consolidation, share exchange or otherwise of assets of the Company or its
subsidiaries representing 10% or more of the consolidated assets of the Company
and its subsidiaries other than in the ordinary course of business, (C) issue,
sale, or other disposition of (including by way of merger, consolidation, share
exchange or any similar transaction) securities (or options, rights or warrants
to purchase, or securities convertible into or exchangeable for, such
securities) representing 10% or more of the voting power of the Company or (D)
transaction in which any person shall acquire beneficial ownership (as such term
is defined in Rule 13d-3 under the Exchange Act), or the right to acquire
beneficial ownership or any "group" (as such term is defined under the Exchange
Act) shall have been formed which beneficially owns or has the right to acquire
beneficial ownership of 25% or more of the outstanding Common Stock.
12
<PAGE>
ARTICLE VI.
COVENANTS OF THE STOCKHOLDERS.
SECTION 6.1. NEGATIVE COVENANTS. Each Stockholder agrees, until the
Option has terminated, not to:
(a) sell, transfer, pledge, assign or otherwise dispose of, or enter
into any contract, option or other arrangement with respect to the sale,
transfer, pledge, assignment or other disposition of, the Shares owned by
such Stockholder to any person other than Parent or Parent's designee and
except as contemplated in Exhibit A;
(b) acquire any additional shares of Common Stock without the prior
consent of Parent other than pursuant to rights under the Company Employees
Stock Purchase Plan or options outstanding on the date of this Agreement;
or
(c) deposit any Shares into a voting trust or grant a proxy or enter
into a voting agreement with respect to any Shares, except for this
Agreement.
SECTION 6.2. FURTHER ASSURANCES. If Parent shall exercise the Option
in accordance with the terms of this Agreement, from time to time and without
additional consideration the Stockholder will execute and deliver, or cause to
be executed and delivered, such additional or further transfers, assignments,
endorsements, consents and other instruments as Parent may reasonably request
for the purpose of effectively carrying out the transactions contemplated by
this Agreement, including the transfer of the Shares to Parent and the release
of any and all Encumbrances with respect thereto.
ARTICLE VII.
MISCELLANEOUS
SECTION 7.1. NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. All representations, warranties and agreements made by the parties
to this Agreement shall terminate at the Closing.
SECTION 7.2. EXPENSES. Except as otherwise provided herein, all costs
and expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such costs and expenses.
SECTION 7.3. NOTICES. All notices or other communications under this
Agreement shall be in writing and shall be given by delivery in person, by
facsimile, cable, telegram, telex or other standard form of telecommunications,
or by registered or certified mail, postage prepaid, return receipt requested,
addressed as follows (or such other address for a
13
<PAGE>
party as shall be specified in a notice given in accordance with this Section
6.3) and shall be deemed to have been given one business day after transmission
by facsimile, cable, telegram, telex of other standard form of
telecommunications or four days after deposit in the U.S. mail:
If to a Stockholder, at the address or facsimile number of such Stockholder
set forth on Exhibit A, with a copy to:
UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, VA 22031
Attention: General Counsel
Facsimile No.: (703) 206-5807
and
Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, CA 94301
Attn: August J. Moretti
and Richard Friedman
Facsimile: (415) 324-0638
If to Parent or Sub:
MFS Communications Company, Inc.
3555 Farnam Street, 2nd Floor
Omaha, Nebraska 68131
Attention: General Counsel
Facsimile No.: (402) 977-5335
With a copy to:
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: John S. D'Alimonte, Esq.
Facsimile No.: (212) 821-8111
SECTION 7.4. SEVERABILITY. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
SECTION 7.5. ENTIRE AGREEMENT. This Agreement and any documents
delivered by the parties in connection herewith
14
<PAGE>
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings among the
parties with respect thereto. No addition to or modification of any provision of
this Agreement shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
SECTION 7.6. ASSIGNMENT, BINDING EFFECT. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties, except that Parent or Sub may assign
all or any of their rights and obligations hereunder to any affiliate of Parent,
provided that no such assignment shall relieve Parent or Sub of its obligations
hereunder if such assignee does not perform such obligations. Subject to the
preceding sentence, this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
Notwithstanding anything contained in this Agreement to the contrary, nothing in
this Agreement, expressed or implied, is intended to confer on any person other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
SECTION 7.7. SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any Delaware Court, this
being in addition to any other remedy to which they are entitled at law or in
equity.
SECTION 7.8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD
TO ITS RULES OF CONFLICT OF LAWS.
SECTION 7.9. HEADINGS. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
15
<PAGE>
SECTION 7.10. COUNTERPARTS. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a
number of copies hereof each signed by less than all, but together signed by all
of the parties hereto.
[Signature Pages follow.]
16
<PAGE>
IN WITNESS WHEREOF, Parent has caused this Agreement to be executed by its
officers thereunto duly authorized and each Stockholder has caused this
Agreement to be executed, or duly executed by an authorized signatory, all as of
the date first written above.
MFS COMMUNICATIONS COMPANY, INC.
By /s/ James Q. Crowe
--------------------------
Name: James Q. Crowe
Title: Chairman of the
Board and Chief
Executive Officer
MFS GLOBAL INTERNET SERVICES, INC.
By /s/ James Q. Crowe
------------------------------
Name: James Q. Crowe
Title: President
[Entity Stockholder]
By__________________________
Name:
Title:
----------------------------
[Individual Stockholder]
17
<PAGE>
Exhibit A
---------
LIST OF STOCKHOLDERS
Name and address Number of Shares
of Stockholder of Common Stock
----------------- ------------------
Richard L. Adams, Jr. 4,700,000(1)
c/o UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, VA 22031
Facsimile: (703) 206-5805
Microsoft Corporation 4,164,000
1 Microsoft Way
Redmond, WA 98052
Attn: Robert Eschelman
Facsimile: (206) 869-1327
Menlo Ventures IV, L.P. 2,563,031
Menlo Evergreen V, L.P. 666,667
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025
Attn: John W. Jarve
Facsimile: (415) 854-7059
John W. Sidgmore 1,091,455(2)
c/o UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, VA 22031
Facsimile: (703) 206-5805
New Enterprise Associates V, 3,229,698
Limited Partnership
1119 St. Paul Street
Baltimore, MD 21202
Attn: Peter J. Barris and
Nancy Dorman
Facsimile: (410) 752-7721
Accel IV L.P. 2,958,403
Accel Investors '93 L.P. 119,499
One Palmer Square
Princeton, NJ 08542
Attn: Carter Sednaoui
Facsimile: (609) 683-0384
18
<PAGE>
Les B. Straus 53,472
PictureTel
The Tower at Northwoods
222 Rosewood Drive
Danvers, MA 01923
Facsimile: (508) 762-5219
Daniel C. Lynch 34,500
25560 La Lanne Court
Los Altos Hills, CA 94022
Facsimile: (415) 948-0757 __________
TOTAL 19,580,725
_____________________
(1) Of the 4,700,000 shares held by Mr. Adams, 325,000 shares may be sold,
gifted or otherwise transferred without restriction under this Agreement
prior to the Closing.
(2) Of the 1,091,455 shares held by Mr. Sidgmore, 355,458 of such shares are
subject to a right of repurchase by the Company if Mr. Sidgmore voluntarily
terminates his employment with the Company before June 27, 1996. In
addition, as of April 30, 1996, the Company has a right of repurchase with
respect to another 562,807 of such shares in the event that Mr. Sidgmore's
employment with the Company is terminated and which right of repurchase
expires with respect to 14,810.70 shares of the last day of each calendar
month so long as Mr. Sidgmore remains employed by the Company; provided,
that such right of repurchase expires with respect to 50 percent of such
shares subject to a right of repurchase in the event of a Change in Control
or involuntary Termination Other Than For Cause (each, as defined in the
Nonstatutory Stock Option Agreement between the Company and Mr. Sidgmore
dated as of July 20, 1994).
19
<PAGE>
Annex C
PARENT VOTING AND PROXY AGREEMENT
DATED AS OF APRIL 29, 1996
AMONG
UUNET TECHNOLOGIES, INC.
AND
EACH OTHER PERSON
LISTED ON THE SIGNATURE PAGES HEREOF
<PAGE>
PARENT VOTING AND PROXY AGREEMENT, dated as of April 29, 1996, (this
"Agreement") among UUNET TECHNOLOGIES, INC., a Delaware corporation (the
---------
"Company") and each other person listed on the signature pages hereof (each, a
- --------
"Stockholder").
- ------------
WHEREAS, as of the date hereof, each Stockholder owns of record the
number of shares of common stock, $0.01 par value (the "Common Stock"), of MFS
------------
COMMUNICATIONS COMPANY, INC., a Delaware corporation ("Parent"), set forth
------
opposite such Stockholder's name on Exhibit A hereto (all such shares now owned
of record and which may hereafter be acquired, as a result of exercise of an
option to acquire shares of Common Stock or otherwise, by such Stockholder prior
to the termination of this Agreement being referred to herein as the "Shares");
------
WHEREAS, the Company, Parent and MFS GLOBAL INTERNET SERVICES, INC., a
wholly owned subsidiary of Parent ("Sub"), have entered into an Agreement and
---
Plan of Merger dated as of the date hereof (the "Merger Agreement"; capitalized
----------------
terms used but not otherwise defined in this Agreement have the meanings
assigned to such terms in the Merger Agreement), which provides, upon the terms
and subject to the conditions set forth therein, for the merger of Sub with and
into the Company (the "Merger"); and
------
WHEREAS, as a condition to the willingness of the Company to enter
into the Merger Agreement and in furtherance of the acquisition of the Company
by Parent, the Company has have required that the Stockholders agree, and in
order to induce the Company to enter into the Merger Agreement, each Stockholder
has agreed, severally and not jointly, to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and
agreements contained herein, the parties hereto agree as follows:
ARTICLE I.
TRANSFER AND VOTING OF SHARES
SECTION 1.1. VOTING AGREEMENT. Each Stockholder hereby agrees that
during the time this Agreement is in effect, at any meeting of the stockholders
of Parent, however called, and in any action by consent of the stockholders of
Parent, such Stockholder shall vote the Shares in favor of the Parent Share
Proposal.
SECTION 1.2. NO DISPOSITION OR ENCUMBRANCE OF SHARES AND OPTIONS. Each
Stockholder hereby covenants and agrees that, from the date hereof to the
termination of this Agreement, it shall not, and shall not offer or agree to,
sell, transfer, tender, assign, hypothecate or otherwise dispose of, or create
or permit to exist any Encumbrance (as hereinafter defined) on the Shares at any
time prior to the Effective Date.
<PAGE>
SECTION 1.3. VOTING OF SHARES; FURTHER ASSURANCES.
(a) Each Stockholder, by this Agreement, with respect to its Shares,
does hereby constitute and appoint the Company, or any nominee of the
Company, with full power of substitution, from the date hereof to the
earlier to occur of the termination of this Agreement or the Effective
Date, as its true and lawful attorney and proxy (its "Proxy"), for and in
-----
its name, place and stead, to vote each of such Shares as its Proxy, at
every annual, special or adjourned meeting of the stockholders of Parent,
including the right to sign its name (as stockholder) to any consent,
certificate or other document relating to Parent that the law of the State
of Delaware may permit or require in favor of the Parent Share Proposal and
the transactions contemplated by the Merger Agreement.
THIS POWER OF ATTORNEY IS IRREVOCABLE, IS GRANTED IN CONSIDERATION OF
PARENT AND SUB ENTERING INTO THE MERGER AGREEMENT AND IS COUPLED WITH AN
INTEREST SUFFICIENT IN LAW TO SUPPORT AN IRREVOCABLE POWER. This
appointment shall revoke all prior attorneys and proxies appointed by any
Stockholder at any time with respect to the Shares and no subsequent
attorneys or proxies will be appointed by such Stockholder, or be
effective, with respect thereto.
(b) Each Stockholder shall perform such further acts and execute such
further documents and instruments as may reasonably be required to vest in
the Company the power to carry out and give effect to the provisions of
this Agreement.
SECTION 1.4. LEGENDS.
(a) Each Stockholder shall instruct Parent to cause each certificate of
any Stockholder evidencing the Shares to bear a legend in the following
form:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED
OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE TERMS AND
CONDITIONS OF THE PARENT VOTING AND PROXY AGREEMENT DATED AS OF APRIL 29, 1996,
AS IT MAY BE AMENDED, AMONG UUNET TECHNOLOGIES, INC. AND THE REGISTERED HOLDER
OF THIS CERTIFICATE, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE
OFFICES OF THE ISSUER.
(b) In the event that the Shares shall cease to be subject to the
restrictions on transfer set forth in this Agreement, Parent shall, upon
the written request of the holder thereof, issue to such holder a new
certificate
2
<PAGE>
evidencing such Shares without the legend required by Section
1.4(a).
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
Each Stockholder, severally and not jointly, hereby represents and
warrants to the Company as follows:
SECTION 2.1. DUE ORGANIZATION, AUTHORIZATION, ETC. Such Stockholder
has all requisite power to execute and deliver this Agreement, to appoint the
Company as its Proxy and to consummate the transactions contemplated hereby.
This Agreement has been duly executed and delivered by such Stockholder and,
assuming its due authorization, execution and delivery by the Company,
constitutes a legal, valid and binding obligation of such Stockholder,
enforceable against such Stockholder in accordance with its terms.
SECTION 2.2. NO CONFLICTS, REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement by such Stockholder do
not, and the performance of this Agreement by such Stockholder will not,
(i) conflict with or violate any statute, law, ordinance, rule, regulation,
order, decree or judgment applicable to such Stockholder or by which it or
any of its properties is bound or affected, or (ii) result in any breach of
or constitute a default (with notice or lapse of time, or both) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any
of the property or assets of such Stockholder, including, without
limitation, the Shares, pursuant to, any indenture or other loan document
provision or other contract, license, franchise, permit or other instrument
or obligation to which such Stockholder is a party or by which such
Stockholder or any of its properties is bound or affected, except for any
such breaches, defaults or other occurrences that would not prevent or
delay the performance by such Stockholder of its obligations under this
Agreement.
(b) The execution and delivery of this Agreement by such Stockholder do
not, and the performance of this agreement by such Stockholder will not,
require any consent, approval, authorization or permit of, or filing with
or notification to, any governmental or regulatory authority, domestic or
foreign, except where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would
not prevent or delay the performance by the Stockholder of its obligations
under this Agreement.
3
<PAGE>
SECTION 2.3. TITLE TO SHARES. Such Stockholder is the record and
beneficial owner of the Shares set forth opposite such Stockholder's name on
Exhibit A hereto, free and clear of any pledge, lien, security interest,
mortgage, charge, claim, equity, option, proxy, voting restriction, right of
first refusal, limitation on disposition, adverse claim of ownership or use or
encumbrance of any kind ("Encumbrances"), other than pursuant to this Agreement.
------------
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each Stockholder as follows:
SECTION 3.1. DUE ORGANIZATION, ETC. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. The Company has all requisite corporate power to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by the Company has been duly authorized by all
necessary corporate action on the part of the Company. This Agreement has been
duly executed and delivered by the Company and, assuming its due authorization,
execution and delivery by each Stockholder, constitutes a legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms.
ARTICLE IV.
MISCELLANEOUS
SECTION 4.1. EXPENSES. Except as otherwise provided herein, all costs
and expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such costs and expenses.
SECTION 4.2. NOTICES. All notices or other communications under this
Agreement shall be in writing and shall be given (and shall be deemed to have
been duly given upon receipt) by delivery in person, by facsimile, cable,
telegram, telex or other standard form of telecommunications, or by registered
or certified mail, postage prepaid, return receipt requested, addressed as
follows (or such other address for a party as shall be specified in a notice
given in accordance with this Section 4.2):
4
<PAGE>
If to a Stockholder:
Prior to May 18, 1996
c/o MFS Communications Company, Inc.
3555 Farnam Street, 2nd Floor
Omaha, Nebraska 68131
Attention: General Counsel
Facsimile No.: (402) 977-5335
On or after May 18, 1996
c/o MFS Communications Company, Inc.
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Attention: General Counsel
Facsimile No.: (402) 231-3545
With a copy to:
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: John S. D'Alimonte, Esq.
Facsimile No.: (212) 821-8111
If to the Company:
UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, Virginia 94301
Attention: General Counsel
Facsimile No.: (703) 206-5807
with a copy to:
Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, California 94301
Attention: August J. Moretti, Esq. and
Richard Friedman, Esq.
Facsimile No.: (415) 324-0638
SECTION 4.3. SEVERABILITY. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
5
<PAGE>
SECTION 4.4. ENTIRE AGREEMENT. This Agreement and any documents
delivered by the parties in connection herewith constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
SECTION 4.5. ASSIGNMENT, BINDING EFFECT. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective heirs, successors, executors, administrators
and assigns. Notwithstanding anything contained in this Agreement to the
contrary, nothing in this Agreement, expressed or implied, is intended to confer
on any person other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
SECTION 4.6. SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any Delaware Court, this
being in addition to any other remedy to which they are entitled at law or in
equity.
SECTION 4.7. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD
TO ITS RULES OF CONFLICT OF LAWS.
SECTION 4.8. HEADINGS. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
SECTION 4.9. COUNTERPARTS. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a
number of copies hereof each signed by less than all, but together signed by all
of the parties hereto.
6
<PAGE>
SECTION 4.10. TERMINATION. This Agreement shall terminate and be of no
further force and effect, automatically and without any required action of the
parties hereto, at the time of the earlier to occur of (i) the Effective Date or
(ii) November 30, 1996.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its officer thereunto duly authorized and each Stockholder has
executed this Agreement, all as of the date first written above.
UUNET TECHNOLOGIES, INC.
By /s/ Martina W. Knee
--------------------------
Name: Martina W. Knee
Title: Vice President and
General Counsel
/s/ James Q. Crowe
----------------------------
James Q. Crowe
7
<PAGE>
SECTION 4.11. TERMINATION. This Agreement shall terminate and be of no
further force and effect, automatically and without any required action of the
parties hereto, at the time of the earlier to occur of (i) the Effective Date or
(ii) November 30, 1996.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its officer thereunto duly authorized and each Stockholder has
executed this Agreement, all as of the date first written above.
UUNET TECHNOLOGIES, INC.
By /s/ Martina W. Knee
--------------------------
Name: Martina W. Knee
Title: Vice President and
General Counsel
/s/ Howard Gimbel
----------------------------
Howard Gimbel
7
<PAGE>
SECTION 4.12. TERMINATION. This Agreement shall terminate and be of no
further force and effect, automatically and without any required action of the
parties hereto, at the time of the earlier to occur of (i) the Effective Date or
(ii) November 30, 1996.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its officer thereunto duly authorized and each Stockholder has
executed this Agreement, all as of the date first written above.
UUNET TECHNOLOGIES, INC.
By /s/ Martina W. Knee
--------------------------
Name: Martina W. Knee
Title: Vice President and
General Counsel
/s/ William Grewcock
----------------------------
William Grewcock
7
<PAGE>
SECTION 4.13. TERMINATION. This Agreement shall terminate and be of no
further force and effect, automatically and without any required action of the
parties hereto, at the time of the earlier to occur of (i) the Effective Date or
(ii) November 30, 1996.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its officer thereunto duly authorized and each Stockholder has
executed this Agreement, all as of the date first written above.
UUNET TECHNOLOGIES, INC.
By /s/ Martina W. Knee
--------------------------
Name: Martina W. Knee
Title: Vice President and
General Counsel
/s/ Royce J. Holland
----------------------------
Royce J. Holland
7
<PAGE>
SECTION 4.14. TERMINATION. This Agreement shall terminate and be of no
further force and effect, automatically and without any required action of the
parties hereto, at the time of the earlier to occur of (i) the Effective Date or
(ii) November 30, 1996.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its officer thereunto duly authorized and each Stockholder has
executed this Agreement, all as of the date first written above.
UUNET TECHNOLOGIES, INC.
By /s/ Martina W. Knee
--------------------------
Name: Martina W. Knee
Title: Vice President and
General Counsel
/s/ Richard R. Jaros
----------------------------
Richard R. Jaros
7
<PAGE>
SECTION 4.15. TERMINATION. This Agreement shall terminate and be of no
further force and effect, automatically and without any required action of the
parties hereto, at the time of the earlier to occur of (i) the Effective Date or
(ii) November 30, 1996.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its officer thereunto duly authorized and each Stockholder has
executed this Agreement, all as of the date first written above.
UUNET TECHNOLOGIES, INC.
By /s/ Martina W. Knee
--------------------------
Name: Martina W. Knee
Title: Vice President and
General Counsel
/s/ Robert E. Julian
----------------------------
Robert E. Julian
7
<PAGE>
SECTION 4.16. TERMINATION. This Agreement shall terminate and be of no
further force and effect, automatically and without any required action of the
parties hereto, at the time of the earlier to occur of (i) the Effective Date or
(ii) November 30, 1996.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its officer thereunto duly authorized and each Stockholder has
executed this Agreement, all as of the date first written above.
UUNET TECHNOLOGIES, INC.
By /s/ Martina W. Knee
--------------------------
Name: Martina W. Knee
Title: Vice President and
General Counsel
/s/ Ronald W. Roskens
----------------------------
Ronald W. Roskens
7
<PAGE>
SECTION 4.17. TERMINATION. This Agreement shall terminate and be of no
further force and effect, automatically and without any required action of the
parties hereto, at the time of the earlier to occur of (i) the Effective Date or
(ii) November 30, 1996.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its officer thereunto duly authorized and each Stockholder has
executed this Agreement, all as of the date first written above.
UUNET TECHNOLOGIES, INC.
By /s/ Martina W. Knee
--------------------------
Name: Martina W. Knee
Title: Vice President and
General Counsel
/s/ Walter Scott, Jr.
----------------------------
Walter Scott, Jr.
7
<PAGE>
SECTION 4.18. TERMINATION. This Agreement shall terminate and be of no
further force and effect, automatically and without any required action of the
parties hereto, at the time of the earlier to occur of (i) the Effective Date or
(ii) November 30, 1996.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its officer thereunto duly authorized and each Stockholder has
executed this Agreement, all as of the date first written above.
UUNET TECHNOLOGIES, INC.
By /s/ Martina W. Knee
--------------------------
Name: Martina W. Knee
Title: Vice President and
General Counsel
/s/ Kenneth E. Stinson
----------------------------
Kenneth E. Stinson
7
<PAGE>
SECTION 4.19. TERMINATION. This Agreement shall terminate and be of no
further force and effect, automatically and without any required action of the
parties hereto, at the time of the earlier to occur of (i) the Effective Date or
(ii) November 30, 1996.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its officer thereunto duly authorized and each Stockholder has
executed this Agreement, all as of the date first written above.
UUNET TECHNOLOGIES, INC.
By /s/ Martina W. Knee
--------------------------
Name: Martina W. Knee
Title: Vice President and
General Counsel
/s/ Michael B. Yanney
----------------------------
Michael B. Yanney
7
<PAGE>
Exhibit A
---------
LIST OF STOCKHOLDERS
Number of
Shares of
Name of Stockholder Common Stock
- --------------------- --------------
James Q. Crowe 467,140
Howard Gimbel 159,918
William Grewcock 3,569,106
Royce J. Holland 61,468
Richard R. Jaros 355,760
Robert E. Julian 1,192,820
Ronald W. Roskens 9,784
Walter Scott, Jr. 9,423,826
Kenneth E. Stinson 139,406
Michael B. Yanney 1,784
<PAGE>
[LETTERHEAD OF GLEACHER NATWEST]
April 29, 1996
Board of Directors
MFS Communications Company, Inc.
3555 Farnam Street
Omaha, NE 68131
Gentlemen:
We understand that MFS Communications Company, Inc. ("MFS" or the "Company") is
contemplating entering into a definitive merger agreement with UUNet
Technologies, Inc. ("UUNet")pursuant to which a subsidiary of MFS ("MFS Sub")
shall be merged with and into UUNet, with UUNet as the surviving corporation.
We further understand that in the merger each share of UUNet capital stock
outstanding immediately prior to the effective time of the merger will be
converted into 1.777776 MFS shares (as adjusted for the MFS stock split
effective April 26, 1996), and each option to purchase a share of UUNet capital
stock will be converted into an option to acquire 1.777776 shares of MFS capital
stock at an exercise price for each underlying share equal to its current
exercise price divided by 1.777776.
You have asked for our opinion as to whether the exchange ratio offered by MFS
to UUNet stockholders is fair from a financial point of view to MFS and its
stockholders.
For the purposes of the opinion set forth herein, we have:
1. analyzed the historical publicly filed financial statements of UUNet
and MFS;
2. discussed the past and current operations, the financial condition
and the prospects of UUNet with the management of MFS and the
management of UUNet, and reviewed with the management of MFS its due
diligence of UUNet;
3. reviewed with the management of MFS certain business plans of MFS,
certain projections prepared by and pertaining to UUNet, certain
financial projections concerning UUNet prepared by the management of
MFS and certain estimates of financial synergies occurring from the
business combination resulting from the merger as prepared by MFS;
4. reviewed the historical market prices and reported trading volumes
of MFS Common Stock and UUNet Common Stock;
5. compared the financial performance of UUNet with, and reviewed the
prices and reported trading activity of the securities of, certain
publicly traded companies whose operating characteristics and/or
industry focus resemble those of UUNet;
6. reviewed the financial terms of selected precedent transactions of
publicly-traded companies with high projected growth rates;
7. performed a discounted cash flow analysis of UUNet based upon public
estimates and the financial information provided to us as referred
to above; and
<PAGE>
GLEACHER NATWEST
Board of Directors
April 29, 1996
Page 2
8. reviewed such other information and performed such other analyses as
we have deemed appropriate.
We have assumed and relied upon, without assuming responsibility for independent
verification, the accuracy and completeness of the information reviewed by us
for purposes of this opinion. With respect to the financial projections provided
to us, we have assumed that they have been reasonably prepared and reflect the
best currently available estimates and judgments of the senior management of MFS
and UUNet as to the future financial performance of MFS and UUNet. We have also
assumed based upon the information which has been provided to us and without
assuming responsibility for independent verification thereof that no material
undisclosed or contingent liability exists with respect to MFS or UUNet. Our
opinion is based necessarily on the economic, market, and other conditions as in
effect on, and the information made available to us as of, the date hereof.
MFS acknowledges that the opinion and any advice or materials provided by
Gleacher NatWest in connection with its engagement hereunder is intended for the
benefit and use of the Board in considering the transaction to which the
opinion, advice or materials relate and the Company agrees that no such opinion,
advice or material shall be used for any other purpose or be reproduced,
disseminated, quoted or referred to at any time, in any manner or for any
purpose, nor shall any public references to Gleacher NatWest be made by or on
behalf of the Company, in each case without Gleacher NatWest's prior written
consent.
Based upon and subject to the foregoing, we are of the opinion that as of the
date hereof the exchange ratio offered by MFS to UUNet stockholders pursuant to
the Transaction is fair from a financial point of view to MFS and is
stockholders.
Very truly yours,
GLEACHER NATWEST INC.
/s/ James Goodwin
- --------------------------
James Goodwin
Managing Director
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a
Delaware corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. A
corporation may, in advance of the final disposition of any civil, criminal,
administrative or investigative action, suit or proceeding, pay the expenses
(including attorneys' fees) incurred by any officer, director, employee or agent
in defending such action, provided that the director or officer undertake to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the corporation. A corporation may indemnify such
person against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
A Delaware corporation may indemnify officers and directors in an action by
or in the right of the corporation to procure a judgment in its favor under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him or
her against the expenses (including attorneys' fees) which he or she actually
and reasonably incurred in connection therewith. The indemnification provided
is not deemed to be exclusive of any other rights to which an officer or
director may be entitled under any corporation's by-law, agreement, vote or
otherwise.
In accordance with Section 145 of the DGCL, Article 7 of MFS' Restated
Certificate of Incorporation (the "Restated Certificate") and MFS' By-laws (the
"By-laws") provide that MFS shall indemnify each person who is or was a
director, officer or employee of MFS (including the heirs, executors,
administrators or estate of such person) or is or was serving at the request of
MFS as director, officer or employee of another corporation, partnership, joint
venture, trust or other enterprise, to the fullest extent permitted under
subsections 145(a), (b), and (c) of the DGCL or any successor statute. The
indemnification provided by the Restated Certificate and the By-laws shall not
be deemed exclusive of any other rights to which any of those seeking
indemnification or advancement of expenses may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his or her official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person. Expenses (including
attorneys' fees) incurred in defending a civil, criminal, administrative or
investigative action, suit or proceeding upon receipt of an undertaking by or on
behalf of the indemnified person to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by MFS. Article 8 of the
Restated Certificate provides that a director of MFS shall not be personally
liable to MFS or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to MFS or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which
the director derived an improper personal benefit. If the DGCL is amended to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of MFS shall be
eliminated or limited to the fullest extent permitted by the DGCL as so amended.
II-1
<PAGE>
Section 8.7 of the By-laws provides that MFS may purchase and maintain
insurance on behalf of its directors, officers, employees and agents against any
liabilities asserted against such persons arising out of such capacities.
ITEM 21. EXHIBITS.
Exhibit No.
-----------
2.1 Agreement and Plan of Merger, dated as of April 29, 1996 among
MFS Communications Company, Inc., MFS Global Internet Services,
Inc. and UUNET Technologies, Inc.
3.1 Restated Certificate of Incorporation./1/
3.2 Amendment No. 1 to Restated Certificate of Incorporation./2/
3.3 Amendment No. 2 to Restated Certificate of Incorporation./3/
3.4 By-laws./4/
4.1 Specimen Common Stock Certificate/1/
5.1 Opinion of Willkie Farr & Gallagher*
9.1 Stockholder Option, Voting and Proxy Agreement, dated as of
April 29, 1996, among MFS Communications Company, Inc. MFS
Global Internet Services, Inc. and certain stockholders of UUNET
Technologies, Inc.
10.1 Rights Agreement, Dated as of September 30, 1995, between MFS
and Continental Stock Transfer & Trust Company as Rights Agent,
which includes the Form of Certificate of Designation,
Preferences and Rights of Series C Junior Participating
Preferred Stock of MFS, as Exhibit A, the Form of Rights
Certificate, as Exhibit B, and Summary of Rights to Purchase
Preferred Stock, as Exhibit C./5/
10.2 Credit Agreement, dated as of April 14, 1995, among MFS, the
banks listed on the signature page thereto, Chemical Bank as
Administrative Agent and Bankers Trust Company, as
Documentation Agent./6/
10.3 Credit Agreement, dated as of April 14, 1995, among MFS Telecom,
Inc., the banks listed on the signature page thereto, Chemical
Bank as Administrative Agent and Bankers Trust Company, as
Documentation Agent./7/
10.4 Registration Rights Agreement, dated as of September 28, 1995,
among MFS, William L. Grewcock and Walter Scott, Jr./8/
10.5 The 1992 Stock Plan of MFS./9/
10.6 The 1993 Stock Plan of MFS, as amended and restated on July 24,
1995 and further amended and restated as of December 15,
1995./12/
10.7 The 1995 Deferred Stock Purchase Plan of MFS, as amended and
restated on August 28, 1995./ 12/
II-2
<PAGE>
10.8 Instrument of Amendment to the 1995 Deferred Stock Purchase Plan
of MFS, as amended and restated on August 28, 1995./ 12/
10.9 The 1996 Employee Stock Bonus Plan of MFS./ 12/
10.10 MFS' 401(k) Plan./10/
10.11 Form of Indemnification Agreement between MFS and Kiewit
Diversified Group./11/
11 Statement computing consolidated net loss per share applicable
to common stockholders./12/
21 Subsidiaries of the Registrant/12/.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Arthur Andersen LLP
23.4 Consent of Willkie Farr & Gallagher*
23.5 Consent of John W. Sidgmore
23.6 Consent of Richard L. Adams, Jr.
24 Power of Attorney (included on Signature Page)
_______________________
* To be filed by amendment.
/1/ Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1 (File no. 33-59358) as amended, originally filed with the
Securities and Exchange Commission on March 11, 1993.
/2/ Incorporated herein by reference to Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994, as filed
with the Securities and Exchange Commission on March 31, 1995.
/3/ Incorporated herein by reference to Exhibit 3.1 to the Registrant's
Current Report on Form 8-K, dated September 30, 1995.
/4/ Incorporated herein by reference to Exhibit 3.2 to the Registrant's
Current Report on Form 8-K, dated September 30, 1995.
/5/ Incorporated by reference to Exhibit No. 1 to the Registrant's Current
Report on Form 8-K/A Amendment No. 1, dated November 21, 1995.
/6/ Incorporated by reference to Exhibit No. 10.1 to the Registrant's
Current Report on Form 8-K, dated April 27, 1995.
/7/ Incorporated by reference to Exhibit No. 10.2 to the Registrant's
Current Report on Form 8-K, dated April 27, 1995.
/8/ Incorporated by reference to Exhibit No. 10.3 to the Registrant's
Current Report on Form 8-K, dated September 30, 1995.
II-3
<PAGE>
/9/ Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1 (File no. 33-59358) as amended, originally filed with the
Securities and Exchange Commission on March 11, 1993.
/10/ Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1 (File no. 33-59358) as amended, originally filed with the
Securities and Exchange Commission on March 11, 1993.
/11/ Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1 (File no. 33-59358) as amended, originally filed with the
Securities and Exchange Commission on March 11, 1993.
/12/ Incorporated herein by reference to the same exhibit number contained
in the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes as follows:
(a) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition
to the information called for by the other Items of the applicable form; and
(b) the registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (a) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment and that, for purposes of determining any liability under the
Securities Act f 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
The undersigned registrant hereby further undertakes that, for the purposes
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 of this
registration statement, or otherwise (other than insurance), the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person, in connection with the Securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in such Act and will be governed by the final adjudication
of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Omaha, State of Nebraska,
on ___________________.
MFS COMMUNICATIONS COMPANY, INC.
By:_____________________________
James Q. Crowe
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James Q. Crowe and Royce J. Holland, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
__________________________ Chairman of the Board and _____________, 1996
James Q. Crowe Chief Executive Officer
(Principal Executive Officer)
__________________________ Executive Vice President, _____________, 1996
R. Douglas Bradbury Chief Financial Officer
(Principal Financial Officer)
and Director
__________________________ Vice President and Controller _____________, 1996
Robert J. Ludvik (Principal Accounting Officer)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------- -------- -------------------
<S> <C> <C>
____________________ Director _____________, 1996
Howard Gimbel
____________________ Director _____________, 1996
Royce J. Holland
____________________ Director _____________, 1996
William L. Grewcock
____________________ Director _____________, 1996
Richard R. Jaros
____________________ Director _____________, 1996
Robert E. Julian
____________________ Director _____________, 1996
David C. McCourt
____________________ Director _____________, 1996
Ronald W. Roskens
____________________ Director _____________, 1996
Walter Scott, Jr.
____________________ Director _____________, 1996
Kenneth E. Stinson
____________________ Director _____________, 1996
Michael B. Yanney
</TABLE>
II-7
<PAGE>
Exhibit 2.1
AGREEMENT AND PLAN
OF MERGER
DATED AS OF
APRIL 29, 1996
AMONG
MFS COMMUNICATIONS COMPANY, INC.
MFS GLOBAL INTERNET SERVICES, INC.
AND
UUNET TECHNOLOGIES, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I. THE MERGER 2
Section 1.1. The Merger........................................................ 2
Section 1.2. Effective Date of the Merger...................................... 2
ARTICLE II. THE SURVIVING CORPORATION............................................... 2
Section 2.1. Certificate of Incorporation...................................... 2
Section 2.2. By-Laws........................................................... 2
Section 2.3. Board of Directors; Officers...................................... 2
Section 2.4. Effects of Merger................................................. 3
ARTICLE III. CONVERSION OF SHARES................................................... 3
Section 3.1. Exchange Ratio.................................................... 3
Section 3.2. Parent to Make Certificates Available............................. 3
Section 3.3. Dividends; Transfer Taxes......................................... 5
Section 3.4. No Fractional Shares.............................................. 5
Section 3.5. Stock Options..................................................... 6
Section 3.6. Stockholders' Meetings............................................ 7
Section 3.7. Closing of the Company's Transfer Books........................... 8
Section 3.8. Assistance in Consummation of the Merger.......................... 8
Section 3.9. Closing........................................................... 9
Section 3.10. No Further Rights in Company Common Stock........................ 9
Section 3.11. No Liability..................................................... 9
Section 3.12. Withholding Rights............................................... 9
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF PARENT................................ 9
Section 4.1. Organization and Qualification.................................... 9
Section 4.2. Capitalization.................................................... 10
Section 4.3. Subsidiaries...................................................... 10
Section 4.4. Authority Relative to this Merger Agreement....................... 11
Section 4.5. Reports and Financial Statements.................................. 12
Section 4.6. Absence of Certain Changes or Events.............................. 13
Section 4.7. Employee Benefit Plans............................................ 13
Section 4.8. ERISA............................................................. 14
Section 4.9. Parent Action..................................................... 15
Section 4.10. Fairness Opinion................................................. 15
Section 4.11. No Brokers....................................................... 15
Section 4.12. Parent Ownership of Company Common Stock......................... 15
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................ 15
Section 5.1. Organization and Qualification.................................... 15
Section 5.2. Capitalization.................................................... 16
Section 5.3. Subsidiaries...................................................... 16
Section 5.4. Authority Relative to this Merger Agreement....................... 17
</TABLE>
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<TABLE>
<S> <C>
Section 5.5. Reports and Financial Statements.................................. 18
Section 5.6. Absence of Certain Changes or Events.............................. 19
Section 5.7. Employee Benefit Plans............................................ 19
Section 5.8. ERISA............................................................. 20
Section 5.9. Takeover Provisions Inapplicable.................................. 20
Section 5.10. Company Action................................................... 21
Section 5.11. Fairness Opinion................................................. 21
Section 5.12. No Brokers....................................................... 21
ARTICLE VI. REPRESENTATIONS AND WARRANTIES REGARDING SUB............................ 21
Section 6.1. Organization...................................................... 21
Section 6.2. Capitalization.................................................... 21
Section 6.3. Authority Relative to this Merger Agreement....................... 22
ARTICLE VII. CONDUCT OF BUSINESS PENDING THE MERGER................................. 22
Section 7.1. Conduct of Business by the Company Pending the Merger............. 22
Section 7.2. Conduct of Business by Parent Pending the Merger.................. 26
Section 7.3. Conduct of Business of Sub........................................ 26
Section 7.4. Notice of Breach.................................................. 26
ARTICLE VIII. ADDITIONAL AGREEMENTS................................................. 26
Section 8.1. Access and Information............................................ 26
Section 8.2. Registration Statement/Proxy Statement............................ 27
Section 8.3. Compliance with the Securities Act................................ 28
Section 8.4. Listing........................................................... 28
Section 8.5. Indemnification................................................... 28
Section 8.6. HSR Act........................................................... 31
Section 8.7. Additional Agreements............................................. 31
Section 8.8. No Solicitation................................................... 32
Section 8.9. Limitation on Acquisition Activities.............................. 33
Section 8.10. Notice of Actions................................................ 33
Section 8.11. Benefit Plans Generally.......................................... 33
Section 8.12. Stockholders' Rights Plan........................................ 34
ARTICLE IX. CONDITIONS PRECEDENT.................................................... 34
Section 9.1. Conditions to Each Party's Obligation to Effect the Merger........ 34
Section 9.2. Conditions to Obligation of the Company to Effect the Merger...... 35
Section 9.3. Conditions to Obligations of Parent and Sub to Effect the Merger.. 35
ARTICLE X. TERMINATION, AMENDMENT AND WAIVER........................................ 36
Section 10.1. Termination...................................................... 36
Section 10.2. Effect of Termination............................................ 38
</TABLE>
ii
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<TABLE>
<S> <C>
Section 10.3. Amendment........................................................ 38
Section 10.4. Extension; Waivers............................................... 38
ARTICLE XI. GENERAL PROVISIONS...................................................... 38
Section 11.1. Non-Survival of Representations, Warranties and Agreements....... 38
Section 11.2. Notices.......................................................... 39
Section 11.3. Fees and Expenses................................................ 40
Section 11.4. Publicity........................................................ 41
Section 11.5. Specific Performance............................................. 41
Section 11.6. Assignment; Binding Effect....................................... 42
Section 11.7. Entire Agreement................................................. 42
Section 11.8. Governing Law.................................................... 42
Section 11.9. Counterparts..................................................... 42
Section 11.10. Headings, Table of Contents, Index of Defined Terms............. 42
Section 11.11. Interpretation.................................................. 42
Section 11.12. Waivers......................................................... 43
Section 11.13. Severability.................................................... 43
Section 11.14. Subsidiaries 43
Exhibit 1.1(a) - The Stock Option Agreement
Exhibit 1.1(b) - The Parent Voting Agreement
Exhibit 8.3(a) - The Affiliate Letter
</TABLE>
iii
<PAGE>
Index of Defined Terms
<TABLE>
<CAPTION>
<S> <C>
Acquisition Proposal............................................................... 32
Affiliate.......................................................................... 28
Certificates....................................................................... 4
Claim.............................................................................. 30
Code............................................................................... 1
Commission......................................................................... 10
Company............................................................................ 1
Company Benefit Plans.............................................................. 19
Company Common Stock............................................................... 3
Company Disclosure Letter.......................................................... 16
Company ERISA Affiliate............................................................ 20
Company Material Adverse Effect.................................................... 15
Company Meeting.................................................................... 8
Company SEC Reports................................................................ 18
DGCL............................................................................... 3
Effective Date..................................................................... 2
Encumbrances....................................................................... 10
ERISA.............................................................................. 13
Excess Shares...................................................................... 6
Exchange Act....................................................................... 12
Exchange Agent..................................................................... 3
Exchange Fund...................................................................... 4
Exchange Ratio..................................................................... 3
Form S-4........................................................................... 27
Fractional Securities Fund......................................................... 6
HSR Act............................................................................ 12
Indemnified Party.................................................................. 29
IRS................................................................................ 14
Merger............................................................................. 1
Merger Agreement................................................................... 1
MS................................................................................. 17
MS Agreement....................................................................... 17
Nasdaq............................................................................. 6
Options............................................................................ 16
Outstanding Options................................................................ 6
Parent............................................................................. 1
Parent Benefit Plans............................................................... 14
Parent Common Stock................................................................ 3
Parent Disclosure Letter........................................................... 10
Parent ERISA Affiliate............................................................. 14
Parent Material Adverse Effect..................................................... 10
</TABLE>
iv
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<TABLE>
<S> <C>
Parent Meeting..................................................................... 8
Parent Rights Plan................................................................. 3
Parent SEC Reports................................................................. 12
Parent Share Proposal.............................................................. 8
Parent Stock Split................................................................. 3
Parent Voting Agreement............................................................ 1
Parent Voting Debt................................................................. 10
Permitted Options.................................................................. 23
Proposed Transactions.............................................................. 16
Proxy Statement/Prospectus......................................................... 27
Purchase Event..................................................................... 37
Securities Act..................................................................... 12
Share Consideration................................................................ 4
Significant Subsidiaries........................................................... 10
Stock Option Agreement............................................................. 1
Stock Option Plans................................................................. 6
Stock Purchase Plan................................................................ 7
Sub................................................................................ 1
Surviving Corporation.............................................................. 2
Voting Debt........................................................................ 16
</TABLE>
v
<PAGE>
0006426.0
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement"), dated as
----------------
of April 29, 1996, by and among MFS COMMUNICATIONS COMPANY, INC., a Delaware
corporation ("Parent"), MFS GLOBAL INTERNET SERVICES, INC., a Delaware
------
corporation and a wholly owned subsidiary of Parent ("Sub"), and UUNET
---
TECHNOLOGIES, INC., a Delaware corporation (the "Company").
-------
W I T N E S S E T H:
--------------------
WHEREAS, Parent and the Company desire to effect a business
combination (the "Merger") by means of the merger of Sub with and into the
------
Company;
WHEREAS, the Boards of Directors of Parent, Sub and the Company have
approved the Merger, upon the terms and subject to the conditions set forth
herein;
WHEREAS, as a condition and inducement to Parent's and Sub's entering
into this Merger Agreement and incurring the obligations set forth herein,
concurrently with the execution and delivery of this Merger Agreement, Parent is
entering into a Stockholder Option, Voting and Proxy Agreement with certain
stockholders of the Company, in the form of Exhibit 1.1(a) (the "Stock Option
------------
Agreement"), pursuant to which, among other things, such stockholders have
- ---------
agreed to grant Parent the irrevocable option to purchase the shares of Company
Common Stock owned by such stockholders; and agreed to vote the shares of
Company Common Stock (as defined below) owned by such stockholders in favor of
the Merger provided for herein and to grant Parent irrevocable proxies to vote
such shares of Company Common Stock;
WHEREAS, as a condition and inducement to the Company's entering into
this Merger Agreement and incurring the obligations set forth herein,
concurrently with the execution and delivery of this Merger Agreement, the
Company is entering into a Parent Voting and Proxy Agreement with certain
stockholders of Parent, in the form of Exhibit 1.1(b) (the "Parent Voting
-------------
Agreement"), pursuant to which, among other things, such stockholders have
- ---------
agreed to vote the shares of Parent Common Stock (as defined below) owned by
such stockholders in favor of the Parent Share Proposal (as defined below)
provided for herein and to grant the Company irrevocable proxies to vote such
shares of Parent Common Stock;
WHEREAS, for Federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code");
----
<PAGE>
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein, the parties hereto
agree as follows:
ARTICLE I.
THE MERGER
SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions
hereof, on the Effective Date (as defined in Section 1.2), Sub shall be merged
with and into the Company and the separate existence of Sub shall thereupon
cease, and the Company, as the surviving corporation in the Merger (the
"Surviving Corporation"), shall by virtue of the Merger continue its corporate
- ----------------------
existence under the laws of the State of Delaware.
SECTION 1.2. EFFECTIVE DATE OF THE MERGER. The Merger shall become
effective at the date and time (the "Effective Date") when a properly executed
--------- ----
Certificate of Merger is duly filed with the Secretary of State of the State of
Delaware, which filing shall be made as soon as practicable following
fulfillment of the conditions set forth in Article IX hereof, or at such time
thereafter as is provided in such Certificate.
ARTICLE II.
THE SURVIVING CORPORATION
SECTION 2.1. CERTIFICATE OF INCORPORATION. Subject to Section 8.5 of
this Merger Agreement, after the Effective Date, the Certificate of
Incorporation of the Surviving Corporation shall be amended and restated in its
entirety to read as the Certificate of Incorporation of Sub as in effect
immediately prior to the Effective Date, except that Article One shall be
amended to read as follows: "The name of the Corporation is UUNET TECHNOLOGIES,
INC."
SECTION 2.2. BY-LAWS. Subject to Section 8.5 of this Merger Agreement,
after the Effective Date, the By-laws of Sub, as in effect immediately prior to
the Effective Date, shall be the By-laws of the Surviving Corporation until
thereafter amended as provided by law, the Certificate of Incorporation of the
Surviving Corporation and such By-laws.
SECTION 2.3. BOARD OF DIRECTORS; OFFICERS. The directors of Sub
immediately prior to the Effective Date and John W. Sidgmore shall be the
directors of the Surviving Corporation and the officers of the Company
immediately prior to the Effective Date shall be the officers of the Surviving
Corporation, in each case until their respective successors are duly elected and
qualified.
2
<PAGE>
SECTION 2.4. EFFECTS OF MERGER. The Merger shall have the effects set
forth in Section 259 of the Delaware General Corporation Law (the "DGCL").
----
ARTICLE III.
CONVERSION OF SHARES
SECTION 3.1. EXCHANGE RATIO. On the Effective Date, by virtue of the
Merger and without any action on the part of any holder of any common stock,
$0.001 par value, of the Company ("Company Common Stock"):
--------------------
(a) All shares of Company Common Stock which are held by the Company or
any subsidiary of the Company, and any shares of Company Common Stock owned
by Parent, Sub or any other subsidiary of Parent, shall be canceled.
(b) Subject to Section 3.4, each remaining outstanding share of Company
Common Stock shall be converted into and represent the right to receive
1.777776, subject to adjustment pursuant to Section 3.1(c) (as may be
adjusted, the "Exchange Ratio") fully paid and nonassessable shares of the
--------------
common stock, $.01 par value, of Parent (the "Parent Common Stock"), which
-------------------
reflects the stock split of the Parent Common Stock that was paid on April
26, 1996 (the "Parent Stock Split"), together with the associated rights
------------------
under Parent's Rights Agreement, dated as of September 30, 1995, between
Parent and Continental Stock Transfer & Trust Company (the "Parent Rights
-------------
Plan").
----
(c) In the event of any stock dividend, stock split, reclassification,
recapitalization, combination or exchange of shares with respect to, or
rights issued in respect of, Parent Common Stock other than the Parent
Stock Split after the date hereof, the Exchange Ratio shall be adjusted
accordingly.
(d) Each issued and outstanding share of capital stock of Sub shall be
converted into and become one fully paid and nonassessable share of Common
Stock, $.01 par value, of the Surviving Corporation.
SECTION 3.2. PARENT TO MAKE CERTIFICATES AVAILABLE.
(e) Prior to the Effective Date, Parent shall appoint Continental Stock
Transfer and Trust Company to act as exchange agent (the "Exchange Agent")
--------------
for the Merger. At the Effective Date, Parent shall deposit with the
Exchange Agent, for the benefit of the holders of shares of Company Common
Stock, for exchange in accordance with this Article III, through the
Exchange Agent, certificates representing a number of shares of Parent
Common Stock equal to the product
3
<PAGE>
(rounded down to the nearest whole number) of the Exchange Ratio multiplied
by the number of shares of Company Common Stock outstanding immediately
prior to the Effective Date. For purposes of the Merger Agreement, shares
of Parent Common Stock, together with any dividends or distributions with
respect thereto, are hereinafter referred to as the "Exchange Fund" and
-------------
such shares of Parent Common Stock, is hereinafter referred to as the
"Share Consideration." The Exchange Agent shall deliver the Share
-------------------
Consideration out of the Exchange Fund as directed by Parent. The Share
Consideration shall be deemed to have been issued on the Effective Date.
(b) On the Effective Date, Parent shall instruct the Exchange Agent to
mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Date represented outstanding shares of
Company Common Stock (collectively, the "Certificates") whose shares were
------------
converted into the right to receive the Share Consideration pursuant to
Section 3.1(b) within three business days of receiving from the Company a
list of such holders of record, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
Parent may reasonably specify) and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for certificates representing
the Share Consideration. Upon surrender of a Certificate for cancellation
to the Exchange Agent, together with such letter of transmittal, duly
executed, and such other documents as reasonably may be required by the
Exchange Agent, and acceptance thereof by the Exchange Agent, each holder
of a Certificate shall be entitled to receive in exchange therefor
certificates representing the Share Consideration that such holder has the
right to receive pursuant to the provisions of this Article III, and the
Certificate so surrendered shall forthwith be canceled. The Exchange Agent
shall accept such Certificates upon compliance with such reasonable terms
and conditions as the Exchange Agent may impose to effect an orderly
exchange thereof in accordance with normal exchange practices. Subject to
applicable law, following surrender of any such Certificate, there shall be
paid to the record holder thereof the certificates representing the Share
Consideration and cash in consideration of fractional shares as provided in
Section 3.4.
(c) Any portion of the Exchange Fund and the Fractional Securities Fund
(as defined below) that remains undistributed to the former stockholders of
the Company for 12 months after the Effective Date shall be delivered to
Parent upon demand. Any holder of shares of Company Common
4
<PAGE>
Stock who has not exchanged his shares for Parent Common Stock in
accordance with subsection (a) within 12 months after the Effective Date
shall have no further claim upon the Exchange Agent and shall thereafter
look only to Parent for payment in respect of his shares of Company Common
Stock. Until so surrendered, certificates representing Company Common Stock
shall represent solely the right to receive the Share Consideration.
(d) Notwithstanding paragraph (b) above, all shares of Company Common
Stock subject to a right of repurchase which remains in effect following
the Merger shall continue to bear a restrictive legend with respect to such
right of repurchase and shall be delivered to Parent to hold, pending the
lapse of the right of repurchase.
SECTION 3.3. DIVIDENDS; TRANSFER TAXES. No dividends or other
distributions that are declared or made on Parent Common Stock will be paid to
persons entitled to receive certificates representing Parent Common Stock
pursuant to this Merger Agreement until such persons surrender their
Certificates representing Company Common Stock. Upon such surrender, there
shall be paid to the person in whose name the certificates representing such
Parent Common Stock shall be issued any dividends or other distributions which
shall have become payable with respect to such Parent Common Stock in respect of
a record date after the Effective Date. In no event shall the person entitled
to receive such dividends be entitled to receive interest on such dividends. In
the event that any certificates for any shares of Parent Common Stock are to be
issued in a name other than that in which the Certificates representing shares
of Company Common Stock surrendered in exchange therefor are registered, it
shall be a condition of such exchange that the Certificate or Certificates so
surrendered shall be properly endorsed or be otherwise in proper form for
transfer and that the person requesting such exchange shall pay to the Exchange
Agent any transfer or other taxes required by reason of the issuance of
certificates for such shares of Parent Common Stock in a name other than that of
the registered holder of the Certificate surrendered, or shall establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
applicable.
SECTION 3.4. NO FRACTIONAL SHARES. No certificates or scrip
representing less than one share of Parent Common Stock shall be issued upon the
surrender for exchange of Certificates representing Company Common Stock
pursuant to Section 3.1(b). In lieu of any such fractional share, each holder
of Company Common Stock who would otherwise have been entitled to a fraction of
a share of Parent Common Stock upon surrender of Certificates for exchange
pursuant to Section 3.1(b) shall be paid upon such surrender cash (without
interest) in an amount equal to such holder's proportionate interest in the net
proceeds from the sale or sales in the open market by the Exchange Agent, on
behalf of
5
<PAGE>
all such holders, of the aggregate fractional Parent Common Stock
issued pursuant to this Section 3.4. As soon as practicable following the
Effective Date, the Exchange Agent shall determine the excess of (i) the number
of full shares of Parent Common Stock delivered to the Exchange Agent by Parent
over (ii) the aggregate number of full shares of Parent Common Stock to be
distributed to holders of Company Common Stock (such excess being herein called
the "Excess Shares"), and the Exchange Agent, as agent for the former holders of
-------------
Company Common Stock, shall sell the Excess Shares at the prevailing prices on
The Nasdaq Stock Market("Nasdaq"). The Exchange Agent shall deduct from the
------
proceeds of the sale of the Excess Shares all commissions and transfer taxes
incurred in connection with such sale of Excess Shares. Until the net proceeds
of such sale have been distributed to the former stockholders of the Company,
the Exchange Agent will hold such proceeds in trust for such former stockholders
(the "Fractional Securities Fund"). As soon as practicable after the
--------------------------
determination of the amount of cash to be paid to former stockholders of the
Company in lieu of any fractional interests, the Exchange Agent shall make
available in accordance with the terms of this Merger Agreement such amounts to
such former stockholders.
SECTION 3.5. STOCK OPTIONS. At or prior to the Effective Date, the
Company and Parent shall take all action necessary to cause the assumption by
Parent as of the Effective Date of the Company's 1995 Performance Option Plan,
Incentive Stock Option Plan, Equity Incentive Plan and Nonemployee Directors
Stock Option Plan (the "Stock Option Plans"). Each of the options to purchase
------------------
Company Common Stock, whether vested or unvested, issued under the Stock Option
Plans or pursuant to separate option agreements outstanding as of the Effective
Date (the "Outstanding Options") shall be converted without any action on the
-------------------
part of the holder thereof into an option to purchase shares of Parent Common
Stock as of the Effective Date. The number of shares of Parent Common Stock
that the holder of an Outstanding Option shall be entitled to receive upon the
exercise of such option shall be a number of whole shares determined by
multiplying the number of shares of Company Common Stock subject to such option,
determined immediately before the Effective Date, by the Exchange Ratio. The
option price of each share of Parent Common Stock subject to an Outstanding
Option shall be the amount (rounded up to the nearest whole cent) obtained by
dividing the exercise price per share of Company Common Stock at which such
option is exercisable immediately before the Effective Date by the Exchange
Ratio. The assumption and substitution of options as provided herein shall not
give the holders of such options additional benefits or additional vesting
rights (other than rights to the acceleration of vesting or the lapse of the
right of repurchase caused by the Merger under existing contractual
arrangements) which they did not have immediately prior to the Effective Date or
relieve the holders of any obligations or restrictions applicable to their
options or the shares obtainable
6
<PAGE>
upon exercise of the options. After the Effective Date, the Stock Option Plans
shall be continued in effect by Parent subject to amendment, modification,
suspension, abandonment or termination as provided therein, and the Stock Option
Plans as so continued shall relate only to the issuance of Parent Common Stock
as provided in this Section 3.5. Parent shall comply with the terms of the Stock
Option Plans and use all reasonable efforts to ensure, to the extent required
by, and subject to the provisions of such Stock Option Plans, that the
Outstanding Options which qualified as incentive stock options prior to the
Effective Date continue to qualify as incentive stock options after the
Effective Date. Parent shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Parent Common Stock for delivery under
Outstanding Options assumed in accordance with this Section 3.5. As soon as
practicable after the Effective Date, and not more than one business day
thereafter, Parent shall file a registration statement on Form S-8 relating to
such assumed options and shall use all reasonable efforts to maintain the
effectiveness of such registration statement (and maintain the current status of
the prospectus or prospectuses contained therein) for so long as such options
remain outstanding. Parent shall use all reasonable efforts to qualify as soon
as practicable after the Effective Date under applicable state securities laws
the issuance of such shares of Parent Common Stock issuable upon exercise of
such Outstanding Options. With respect to those individuals who subsequent to
the Merger will be subject to the reporting requirements under Section 16(a) of
the Exchange Act, Parent shall administer the Stock Option Plans assumed
pursuant to this Section 3.5 in a manner that complies with Rule 16b-3
promulgated under the Exchange Act to the extent the Stock Option Plans complied
with such rule prior to the Merger. Upon the earlier to occur of (i) July 31,
1996 or (ii) the trading day immediately preceding the Effective Date, all then
outstanding rights to acquire shares of Company Common Stock under the Company's
Employee Stock Purchase Plan (the "Stock Purchase Plan") will be exercised for
-------------------
the purchase of shares of Company Common Stock. Effective no later than the
close of the second trading day immediately preceding the Effective Date, (but
in no event prior to the exercise contemplated in the previous sentence), the
Board of Directors of the Company shall terminate the Stock Purchase Plan and
all outstanding options to purchase Company Common Stock thereunder. All funds
contributed to the Stock Purchase Plan that have not been used to purchase
shares of Company Common Stock shall be returned, in cash, to participants of
the Stock Purchase Plan as soon as administratively feasible after such
termination date, in accordance with Section 17(b) of the Stock Purchase Plan.
SECTION 3.6. STOCKHOLDERS' MEETINGS.
(a) The Company shall take all action necessary, in accordance with
applicable law and its Certificate of
7
<PAGE>
Incorporation and By-laws, to convene a special meeting of the holders of
Company Common Stock (the "Company Meeting") as promptly as practicable for
---------------
the purpose of considering and taking action upon this Merger Agreement.
The Board of Directors of the Company will recommend that holders of
Company Common Stock vote in favor of and approve the Merger and the
adoption of the Merger Agreement at the Company Meeting. The Company shall
use all reasonable efforts to solicit from its stockholders proxies in
favor of the adoption of the Merger Agreement and shall take all other
action necessary or advisable to secure the vote or consent of stockholders
required by Delaware law to obtain such approval. At the Company Meeting,
all of the shares of Company Common Stock then owned by Parent, Sub, or any
other subsidiary of Parent, or with respect to which Parent, Sub, or any
other subsidiary of Parent holds the power to direct the voting, will be
voted in favor of approval of the Merger and adoption of this Merger
Agreement.
(b) Parent shall take all action necessary, in accordance with
applicable law and its Certificate of Incorporation and By-laws, to convene
a special meeting of the holders of Parent capital stock (the "Parent
------
Meeting") as promptly as practicable for the purpose of considering and
-------
taking action to authorize the issuance of Parent Common Stock associated
with the Merger under the applicable guidelines of Nasdaq (the "Parent
------
Share Proposal"). The Board of Directors of Parent will recommend that
--------------
holders of Parent Common Stock vote in favor of and approve the Parent
Share Proposal at the Parent Meeting. Parent shall use all reasonable
efforts to solicit from its stockholders proxies in favor of the adoption
of the Parent Share Proposal and shall take all other action necessary or
advisable to secure the vote or consent of stockholders required by
Delaware law to obtain such approval.
SECTION 3.7. CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the
Effective Date, the stock transfer books of the Company shall be closed and no
transfer of shares of Company Common Stock shall be made thereafter. In the
event that, after the Effective Date, Certificates are presented to the
Surviving Corporation, they shall be canceled and exchanged for Parent Common
Stock and/or cash as provided in Sections 3.1(b) and 3.4.
SECTION 3.8. ASSISTANCE IN CONSUMMATION OF THE MERGER. Each of
Parent, Sub and the Company shall provide all reasonable assistance to, and
shall cooperate with, each other to bring about the consummation of the Merger
as soon as possible in accordance with the terms and conditions of this Merger
Agreement. Parent shall cause Sub to perform all of its obligations in
connection with this Merger Agreement.
8
<PAGE>
SECTION 3.9. CLOSING. The closing of the transactions contemplated by
this Merger Agreement shall take place (i) at the offices of Willkie Farr &
Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022,
as soon as practicable after the last of the conditions set forth in Article IX
is fulfilled or waived or (ii) at such other time and place as Parent and the
Company shall agree in writing.
SECTION 3.10. NO FURTHER RIGHTS IN COMPANY COMMON STOCK. All shares of
Parent Common Stock issued upon conversion of the shares of Company Common Stock
in accordance with the terms hereof (including any cash paid pursuant to
Sections 3.3 or 3.4) shall be deemed to have been issued in full satisfaction of
all rights pertaining to such shares of Company Common Stock.
SECTION 3.11. NO LIABILITY. Neither Parent nor the Company shall be
liable to any holder of shares of Company Common Stock for any such shares of
Company Common Stock (or dividends or distributions with respect hereto), or
cash delivered to a public official pursuant to any abandoned property, escheat
or similar law, rule, regulation, statute, order, judgment or decree.
SECTION 3.12. WITHHOLDING RIGHTS. Each of Surviving Corporation and
Parent shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Merger Agreement to any holder of shares of Company
Common Stock such amounts as it is required to deduct and withhold with respect
to the making of such payment under the Code, or any provision of state, local
or foreign tax law. To the extent that amounts are so withheld by the Surviving
Corporation or Parent, as the case may be, such withheld amounts shall be
treated for all purposes of this Merger Agreement as having been paid to the
holder of the shares of Company Common Stock in respect of which such deduction
and withholding was made by the Surviving Corporation or Parent, as the case may
be.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows:
SECTION 4.1. ORGANIZATION AND QUALIFICATION. Parent is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power to carry on its business as it is
now being conducted or currently proposed to be conducted. Parent is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities make such qualification necessary, except
where the
9
<PAGE>
failure to be so qualified will not, individually or in the aggregate,
have a material adverse effect on the business, properties, assets, condition
(financial or otherwise), liabilities or operations of Parent and its
subsidiaries taken as a whole (a "Parent Material Adverse Effect"). Complete
------------------------------
and correct copies as of the date hereof of the Certificate of Incorporation and
By-laws of Parent have been delivered to the Company as part of a disclosure
letter delivered by Parent to the Company prior to the date of this Merger
Agreement (the "Parent Disclosure Letter").
------------------------
SECTION 4.2. CAPITALIZATION. The authorized capital stock of Parent
consists of 400,000,000 shares of Parent Common Stock, and 25,000,000 shares of
preferred stock, $.01 par value. As of April 26, 1996, as adjusted for the
Parent Stock Split (i) 125,804,234 shares of Parent Common Stock were validly
issued and outstanding, fully paid and nonassessable, (ii) 95,000 shares of
Parent's Series A 8% Cumulative Convertible Preferred Stock, were validly issued
and outstanding, fully paid, and nonassessable and (iii) 15,000,000 shares of
Series B Cumulative Convertible Preferred Stock were validly issued and
outstanding, fully paid, and nonassessable. As of the date hereof, there are no
bonds, debentures, notes or other indebtedness having the right to vote on any
matters on which the Parent's stockholders may vote ("Parent Voting Debt")
------------------
issued or outstanding. As of April 26, 1996, after giving effect to the Parent
Stock Split, except for options to acquire 20,614,274 shares of Parent Common
Stock pursuant to the Parent's 1992 Stock Plan and 1993 Stock Plan, warrants to
purchase 1,500,000 shares of Parent Common Stock, commitments to issue shares of
Parent Common Stock under Parent's Shareworks and Shareworks Plus programs and
commitments to issue shares of Parent Common Stock to non-employee directors
pursuant to Parent's 1993 Stock Plan, and, except as provided herein and in the
Parent Rights Plan, there are no options, warrants, calls or other rights,
agreements or commitments presently outstanding obligating Parent to issue,
deliver or sell shares of its capital stock or debt securities, or obligating
Parent to grant, extend or enter into any such option, warrant, call or other
such right, agreement or commitment. All of the shares of Parent Common Stock
issuable in accordance with this Merger Agreement in exchange for Company Common
Stock at the Effective Date will be, when so issued, duly authorized, validly
issued, fully paid and nonassessable and shall be delivered free and clear of
any pledge, lien, security interest, mortgage, charge, claim, equity, option,
proxy, voting restriction, right of first refusal, limitation on disposition,
adverse claim of ownership or use or encumbrance of any kind ("Encumbrances"),
------------
including any preemptive rights of any stockholder of Parent.
SECTION 4.3. SUBSIDIARIES. The only "Significant Subsidiaries" (as
such term is defined in Rule 1-02 of Regulation S-X of the Securities and
Exchange Commission (the "Commission")) ("Significant Subsidiaries") of Parent
---------- ------------------------
are those named in Section
10
<PAGE>
4.3 of the Parent Disclosure Letter or set forth on Exhibit 21 to Parent's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995. Each
Significant Subsidiary incorporated in the United States is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has the corporate power to carry on its
business as it is now being conducted or currently proposed to be conducted.
Each Significant Subsidiary is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities makes
such qualification necessary except where the failure to be so qualified will
not have a Parent Material Adverse Effect. Except as disclosed in Section 4.3 of
the Parent Disclosure Letter, all the outstanding shares of capital stock of
each Significant Subsidiary are validly issued, fully paid and nonassessable and
owned by Parent or by a Significant Subsidiary of Parent free and clear of any
Encumbrances. There are no existing options, warrants, calls or other rights,
agreements or commitments of any character relating to the issued or unissued
capital stock or other securities of any of the Significant Subsidiaries of
Parent. Except as set forth in the Parent's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, as disclosed in Section 4.3 of the Parent
Disclosure Letter and except for wholly owned subsidiaries which are formed
after the date hereof in the ordinary course of business, Parent does not
directly or indirectly own any interest in any other corporation, partnership,
joint venture or other business association or entity that is a Significant
Subsidiary.
SECTION 4.4. AUTHORITY RELATIVE TO THIS MERGER AGREEMENT.
(a) Parent has the corporate power to execute and deliver this Merger
Agreement and to carry out its obligations hereunder. The execution and
delivery of this Merger Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by Parent's Board of
Directors. The Merger Agreement constitutes a valid and binding obligation
of Parent, enforceable against Parent in accordance with its terms, except
as enforcement may be limited by bankruptcy, insolvency or other similar
laws affecting the enforcement of creditors' rights generally and except
that the availability of equitable remedies, including specific
performance, is subject to the discretion of the court before which any
proceeding therefor may be brought. Except for the approval of the holders
of the Parent capital stock described in Section 3.6(b), no other corporate
proceedings on the part of Parent are necessary to authorize the execution
and delivery by Parent of this Merger Agreement or the consummation of the
transactions contemplated hereby.
11
<PAGE>
(b) The execution and delivery of this Merger Agreement and the
consummation of the transactions contemplated hereby, does not and will not
result in the change in conversion ratios, conversion rights or voting
rights, or the breach, violation, default (with or without notice or lapse
of time, or both), termination, cancellation or acceleration of any
obligation or the loss of a material benefit, under (i) the Parent's
charter or by-laws or (ii) any indenture or other loan document provision
or other contract, license, franchise, permit, order, decree, concession,
lease, instrument, judgment, statute, law, ordinance, rule or regulation
applicable to Parent or any of its subsidiaries or their respective
properties or assets, other than, in the case of clause (ii) only, (A) any
breaches, violations, defaults, terminations, cancellations, accelerations
or losses which, either singly or in the aggregate, will not have a Parent
Material Adverse Effect or prevent the consummation of the transactions
contemplated hereby and (B) the laws and regulations referred to in the
next paragraph.
(c) Except as disclosed in Section 4.4 of the Parent Disclosure Letter,
or in connection, or in compliance, with the provisions of the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the
-------
Securities Act of 1933, as amended (the "Securities Act"), the Securities
--------------
Exchange Act of 1934 (the "Exchange Act"), and the corporation, securities
------------
or blue sky laws or regulations of the various states, no filing or
registration with, or authorization, consent or approval of, any public
body or authority is necessary for the consummation by Parent of the Merger
or the other transactions contemplated by this Merger Agreement, other than
filings, registrations, authorizations, consents or approvals the failure
of which to make or obtain will not have a Parent Material Adverse Effect
or prevent the consummation of the transactions contemplated hereby.
SECTION 4.5. REPORTS AND FINANCIAL STATEMENTS. Parent has previously
furnished the Company with true and complete copies of its (i) Annual Report on
Form 10-K, as amended, for the fiscal years ended December 31, 1994 and December
31, 1995, as filed with the Commission, (ii) proxy statements related to all
meetings of its stockholders (whether annual or special) since January 1, 1994,
and (iii) all other reports or registration statements filed by Parent with the
Commission under the Exchange Act since December 31, 1992 through the date
hereof, except Quarterly Reports on Form 10-Q for fiscal quarters ended prior to
December 31, 1995 (the items in clauses (i) through (iii) being referred to
herein collectively as the "Parent SEC Reports"). As of their respective dates,
------------------
the Parent SEC Reports complied in all material respects with the requirements
of the Exchange Act, and the rules and regulations of the Commission thereunder
applicable
12
<PAGE>
to such Parent SEC Reports. As of their respective dates, the Parent SEC Reports
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements and unaudited interim
financial statements of Parent included in the Parent SEC Reports comply as to
form in all material respects with applicable accounting requirements and with
the published rules and regulations of the Commission with respect thereto. The
financial statements included in the Parent SEC Reports: have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis (except as may be indicated therein or in the notes thereto); present
fairly, in all material respects, the financial position of Parent and its
subsidiaries as at the dates thereof and the results of their operations and
cash flows for the periods then ended subject, in the case of the unaudited
interim financial statements, to normal year-end audit adjustments, any other
adjustments described therein and the fact that certain information and notes
have been condensed or omitted in accordance with the Exchange Act and the rules
promulgated thereunder; and are in all material respects, in accordance with the
books of account and records of Parent.
SECTION 4.6. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
disclosed in the Parent SEC Reports or as disclosed in Section 4.6 of the Parent
Disclosure Letter, from December 31, 1995 through the date of this Merger
Agreement, there has not been (i) any transaction, commitment, dispute or other
event or condition (financial or otherwise) of any character (whether or not in
the ordinary course of business) individually or in the aggregate having a
Parent Material Adverse Effect (other than as a result of changes in laws or
regulations of general applicability); (ii) any damage, destruction or loss,
whether or not covered by insurance, which would have a Parent Material Adverse
Effect; or (iii) any entry into any commitment or transaction material to Parent
and its subsidiaries taken as a whole (including, without limitation, any
borrowing or sale of assets) except in the ordinary course of business
consistent with past practice.
SECTION 4.7. EMPLOYEE BENEFIT PLANS. Except as disclosed in the
Parent SEC Reports or as disclosed in Section 4.7 of the Parent Disclosure
Letter, there are no material employee benefit or compensation plans, agreements
or arrangements, including "employee benefit plans," as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
-----
and including, but not limited to, plans, agreements or arrangements relating to
former employees, including, but not limited, to retiree medical plans,
maintained or contributed to by Parent or any of its subsidiaries or material
collective bargaining agreements to which Parent or any
13
<PAGE>
of its subsidiaries is a party, other than "multiemployer plans," as defined in
Section 3(37) of ERISA (together, the "Parent Benefit Plans"). To the best
--------------------
knowledge of Parent, no default exists with respect to the obligations of Parent
or any of its subsidiaries under any Parent Benefit Plan, which default, alone
or in the aggregate, would have a Parent Material Adverse Effect. Since January
1, 1995, there have been no disputes or grievances subject to any grievance
procedure, unfair labor practice proceedings, arbitration or litigation under
any Parent Benefit Plans, which have not been finally resolved, settled or
otherwise disposed of (other than claims for benefits in the ordinary course),
nor, to the best knowledge of Parent, is there any condition related to any
Parent Benefit Plans which, with notice or lapse of time or both, which failure
to resolve, settle or otherwise dispose of, alone or in the aggregate with any
other such conditions, would have a Parent Material Adverse Effect. Since
January 1, 1995, there have been no strikes, lockouts or work stoppages or
slowdowns, or to the best knowledge of Parent, jurisdictional disputes or
organizing activity occurring or threatened with respect to the business or
operations of Parent or its subsidiaries which have had or would have a Parent
Material Adverse Effect.
SECTION 4.8. ERISA. All Parent Benefit Plans have been administered
in accordance, and are in compliance with the applicable provisions of ERISA,
except where such failures to administer or comply would not have a Parent
Material Adverse Effect. Each of the Parent Benefit Plans which is intended to
meet the requirements of Section 401(a) of the Code has been determined by the
Internal Revenue Service (the "IRS") to meet the requirements of such section of
---
the Code (except with respect to any such benefit plans which have not yet been
submitted to the IRS, each of which is still within the "remedial amendment
period" described in Section 401(b) of the Code), and Parent knows of no fact
which is likely to have an adverse affect on the qualified status of such plans.
None of the Parent Benefit Plans are subject to Title IV of ERISA, and neither
Parent nor any entity treated as a single employer with Parent under Section
414(b) or (c) of the Code (a "Parent ERISA Affiliate") has maintained such a
----------------------
plan during the six-year period ended on the date hereof. To the best knowledge
of Parent, there are not now nor have there been any non-exempt "prohibited
transactions," as such term is defined in Section 4975 of the Code or Section
406 of ERISA, involving the Parent Benefit Plans which could subject Parent or
its subsidiaries to any penalty or tax imposed under Section 502(i) of ERISA or
Section 4975 of the Code other than a de minimis penalty or tax. Neither Parent
----------
nor any Parent ERISA Affiliate has any obligation to contribute to, or has had
within the six-year period ending on the date hereof, any obligation to or has
actually contributed to, any multiemployer plan. Neither Parent nor any ERISA
Affiliate has engaged in any transaction described in Section 4069 of ERISA
within the five-year period ending on the date hereof.
14
<PAGE>
SECTION 4.9. PARENT ACTION. The Board of Directors of Parent (at a
meeting duly called and held) has by the unanimous vote of all directors present
with no abstentions (a) determined that the Parent Share Proposal is advisable
and in the best interests of Parent and its stockholders and (b) recommended the
approval of the Parent Share Proposal by the holders of Parent Common Stock and
directed that the Parent Share Proposal be submitted for consideration by
Parent's stockholders at the Parent Meeting.
SECTION 4.10. FAIRNESS OPINION. Parent has received the written
opinion of Gleacher NatWest Inc., financial advisor to Parent, dated no later
than the date hereof, to the effect that the Exchange Ratio is fair to the
stockholders of Parent from a financial point of view.
SECTION 4.11. NO BROKERS. Except for Gleacher NatWest Inc., no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
or commission in connection with the Merger or the transactions contemplated by
this Merger Agreement based upon arrangements made by or on behalf of Parent.
SECTION 4.12. PARENT OWNERSHIP OF COMPANY COMMON STOCK. Parent and its
"associates" and "affiliates" (as defined under both Section 203 of the DGCL and
Rule 405 under the Securities Act), collectively beneficially own and have
beneficially owned at all times during the three-year period prior to the date
hereof less than 1% of the shares of Company Common Stock outstanding (other
than shares of Company Common Stock issuable pursuant to the Stock Option
Agreement to be entered into concurrently herewith).
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub as follows:
SECTION 5.1. ORGANIZATION AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the corporate power to carry on its business as
it is now being conducted or currently proposed to be conducted. The Company is
duly qualified as a foreign corporation to do business, and is in good standing,
in each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary, except
where the failure to be so qualified will not have a material adverse effect on
the business, properties, assets, condition (financial or otherwise),
liabilities or operations of the Company and its subsidiaries taken as a whole
(a "Company Material Adverse Effect"). Complete and correct copies as of the
-------------------------------
date hereof of
15
<PAGE>
the Certificate of Incorporation and By-laws of the Company and each of its
subsidiaries have been delivered to Parent as part of a disclosure letter
delivered by the Company to Parent on or prior to the date of this Merger
Agreement (the "Company Disclosure Letter").
-------------------------
SECTION 5.2. CAPITALIZATION. The authorized capital stock of the
Company consists of 175,000,000 shares of Company Common Stock and 500,000
shares of preferred stock, $0.001 par value. As of April 26, 1996, (i)
32,258,139 shares of Company Common Stock were validly issued and outstanding,
fully paid and nonassessable and (ii) no shares of preferred stock were issued
and outstanding. As of the date hereof, there are no bonds, debentures, notes
or other indebtedness having the right to vote on any matters on which the
Company's stockholders may vote ("Voting Debt") issued or outstanding. As of
-----------
April 26, 1996, except for (i) options to acquire 3,232,015 shares of Company
Common Stock (the "Options"), (ii) options outstanding under the Company's
-------
Employee Stock Purchase Plan, and (iii) the issuance of shares pursuant to the
proposed transactions described in Section 5.2 of the Company Disclosure Letter
(the "Proposed Transactions"), there are no options, warrants, calls or other
---------------------
rights, agreements or commitments presently outstanding obligating the Company
to issue, deliver or sell shares of its capital stock or debt securities, or
obligating the Company to grant, extend or enter into any such option, warrant,
call or other such right, agreement or commitment.
SECTION 5.3. SUBSIDIARIES. The only Significant Subsidiaries of the
Company are disclosed in Section 5.3 of the Company Disclosure Letter, all of
which have been named in the Company SEC Reports (as hereinafter defined). Each
Significant Subsidiary is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation and has the
corporate power to carry on its business as it is now being conducted or
currently proposed to be conducted. Each Significant Subsidiary incorporated in
the United States is duly qualified as a foreign corporation to do business, and
is in good standing, in each jurisdiction where the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary except where the failure to be so qualified will not
have a Company Material Adverse Effect. All the outstanding shares of capital
stock of each Significant Subsidiary are validly issued, fully paid and
nonassessable and owned by the Company or by a subsidiary of the Company free
and clear of any Encumbrances. There are no existing options, warrants, calls
or other rights, agreements or commitments of any character relating to the
issued or unissued capital stock or other securities of any of the Significant
Subsidiaries of the Company. Except as set forth in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995, as disclosed in
Section 5.3 of the Company Disclosure Letter and except for wholly owned
16
<PAGE>
subsidiaries which are formed after the date hereof in the ordinary course of
business, the Company does not directly or indirectly own any interest in any
other corporation, partnership, joint venture or other business association or
entity.
SECTION 5.4. AUTHORITY RELATIVE TO THIS MERGER AGREEMENT.
(a) The Company has the corporate power to execute and deliver this
Merger Agreement and to carry out its obligations hereunder and, subject to
approval of the Merger Agreement by the holders of the Company Common
Stock, to carry out its obligations hereunder. The execution and delivery
of this Merger Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by the Company's Board of
Directors. This Merger Agreement constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance
with its terms, except as enforcement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors'
rights generally and except that the availability of equitable remedies,
including specific performance, is subject to the discretion of the court
before which any proceeding therefor may be brought.
(b) Except as disclosed in Section 5.4 of the Company Disclosure Letter,
the execution and delivery of this Merger Agreement and the consummation of
the transactions contemplated hereby, does not and will not result in the
breach, violation, default (with or without notice or lapse of time, or
both), termination, cancellation or acceleration of any obligation or the
loss of a material benefit, under (i) the Company's charter or by-laws or
(ii) any indenture or other loan document provision or other contract,
license, franchise, permit, order, decree, concession, lease, instrument,
judgment, statute, law, ordinance, rule or regulation applicable to the
Company or any of its subsidiaries or their respective properties or
assets, other than, in the case of clause (ii) only, (A) any breaches,
violations, defaults, terminations, cancellations, accelerations or losses
which, either singly or in the aggregate, will not have a Company Material
Adverse Effect or prevent the consummation of the transactions contemplated
hereby and (B) the laws and regulations referred to in the next paragraph.
Contemporaneously with the execution and delivery of this Merger Agreement,
Microsoft Corporation ("MS") has delivered a written waiver of any (i) MS
--
right of first refusal or first offer contained in that certain TCP/IP
Local Access Network Agreement, dated as of March 6, 1995, by and between
MS and the Company (the "MS Agreement"), (ii) any MS right of termination
------------
of the MS Agreement, in each case as a result of the execution and
17
<PAGE>
delivery of this Merger Agreement and the consummation of the transactions
contemplated hereby, (iii) any MS right to declare a default under the
Equipment Loan Agreement dated as of March 6, 1996, between MS and the
Company as a result of the exercise of the rights granted under the Stock
Option Agreement or the consummation of the transactions contemplated
hereby and (iv) any MS right to have representation on the Company's Board
of Directors. In addition, contemporaneously with the execution and
delivery of this Merger Agreement, Microsoft Network L.L.C. has delivered a
written waiver of any right of termination of the TCP/IP Network Access
Provider Agreement, dated April 9, 1996, as a result of the execution and
delivery of this Merger Agreement and the consummation of the transactions
contemplated hereby.
(c) Except as disclosed in Section 5.4 of the Company Disclosure Letter
or transactions contemplated thereby in connection, or in compliance, with
the provisions of the HSR Act, the Securities Act, the Exchange Act, and
the corporation, securities or blue sky laws or regulations of the various
states, no filing or registration with, or authorization, consent or
approval of, any public body or authority is necessary for the consummation
by the Company of the Merger or the other transactions contemplated hereby,
other than filings, registrations, authorizations, consents or approvals
the failure of which to make or obtain will not have a Company Material
Adverse Effect or prevent the consummation of the transactions contemplated
hereby.
SECTION 5.5. REPORTS AND FINANCIAL STATEMENTS. The Company has
previously furnished Parent with true and complete copies of its (i) Annual
Report on Form 10-K, as amended, for the fiscal year ended December 31, 1995, as
filed with the Commission, (ii) proxy statements related to all meetings of its
stockholders (whether annual or special) since January 1, 1995, and (iii) all
other reports or registration statements filed by the Company with the
Commission under the Exchange Act since December 31, 1994, except Quarterly
Reports on Form 10-Q for fiscal quarters ended prior to December 31, 1995 (the
items in clauses (i) through (iii) being referred to herein collectively as the
"Company SEC Reports"). As of their respective dates, the Company SEC Reports
-------------------
complied in all material respects with the requirements of the Exchange Act and
the rules and regulations of the Commission thereunder applicable to such
Company SEC Reports. As of their respective dates, the Company SEC Reports did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim financial
statements of the Company included in the Company SEC Reports comply as to form
in all material respects with applicable accounting
18
<PAGE>
requirements and with the published rules and regulations of the Commission with
respect thereto. The financial statements included in the Company SEC Reports:
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as may be indicated therein or in the
notes thereto); present fairly, in all material respects, the financial position
of the Company and its subsidiaries as at the dates thereof and the results of
their operations and cash flow for the periods then ended subject, in the case
of the unaudited interim financial statements, to normal year-end audit
adjustments and any other adjustments described therein and the fact that
certain information and notes have been condensed or omitted in accordance with
the Exchange Act and the rules promulgated thereunder; and are in all material
respects, in accordance with the books of account and records of the Company.
SECTION 5.6. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
disclosed in the Company SEC Reports or as disclosed in Section 5.6 of the
Company Disclosure Letter, from December 31, 1995 through the date of this
Merger Agreement, there has not been (i) any transaction, commitment, dispute or
other event or condition (financial or otherwise) of any character (whether or
not in the ordinary course of business) individually or in the aggregate having
a Company Material Adverse Effect (other than as a result of changes in laws or
regulations of general applicability); (ii) any damage, destruction or loss,
whether or not covered by insurance, which would have a Company Material Adverse
Effect; or (iii) any entry into any commitment or transaction material to the
Company and its subsidiaries taken as a whole (including, without limitation,
any borrowing or sale of assets) except in the ordinary course of business
consistent with past practice.
SECTION 5.7. EMPLOYEE BENEFIT PLANS. Except as disclosed in the
Company SEC Reports or as disclosed in Section 5.7 of the Company Disclosure
Letter, there are no material employee benefit or compensation plans, agreements
or arrangements, including "employee benefit plans," as defined in Section 3(3)
of ERISA, and including, but not limited to, plans, agreements or arrangements
relating to former employees, including, but not limited, to retiree medical
plans, maintained or contributed to by the Company or any of its subsidiaries or
material collective bargaining agreements to which the Company or any of its
subsidiaries is a party, other than "multiemployer plans," as defined in Section
3(37) of ERISA (together, the "Company Benefit Plans"). To the best knowledge
---------------------
of the Company, no default exists with respect to the obligations of the Company
or any of its subsidiaries under any Company Benefit Plan, which default, alone
or in the aggregate, would have a Company Material Adverse Effect. Since
January 1, 1995, there have been no disputes or grievances subject to any
grievance procedure, unfair labor practice proceedings, arbitration or
litigation under any Company Benefit Plans, which have not been finally
resolved,
19
<PAGE>
settled or otherwise disposed of (other than claims for benefits in the ordinary
course), nor, to the best knowledge of the Company, is there any condition
related to any Company Benefit Plans which, with notice or lapse of time or
both, which failure to resolve, settle or otherwise dispose of, alone or in the
aggregate with any other such conditions, would have a Company Material Adverse
Effect. Since January 1, 1995, there have been no strikes, lockouts or work
stoppages or slowdowns, or to the best knowledge of the Company, jurisdictional
disputes or organizing activity occurring or threatened with respect to the
business or operations of the Company or its subsidiaries which have had or
would have a Company Material Adverse Effect.
SECTION 5.8. ERISA. All Company Benefit Plans have been administered
in accordance, and are in compliance with the applicable provisions of ERISA,
except where such failures to administer or comply would not have a Company
Material Adverse Effect. Each of the Company Benefit Plans which is intended to
meet the requirements of Section 401(a) of the Code has been determined by the
IRS to meet the requirements of such section of the Code (except with respect to
any such benefit plans which have not yet been submitted to the IRS, each of
which is still within the "remedial amendment period" described in Section
401(b) of the Code), and the Company knows of no fact which is likely to have an
adverse affect on the qualified status of such plans. None of the Company
Benefit Plans are subject to Title IV of ERISA, and neither the Company nor any
entity treated as a single employer with Company under Section 414(b) or (c) of
the Code (a "Company ERISA Affiliate") has maintained such a plan during the
-----------------------
six-year period ended on the date hereof. To the best knowledge of the Company,
there are not now nor have there been any non-exempt "prohibited transactions,"
as such term is defined in Section 4975 of the Code or Section 406 of ERISA,
involving the Company Benefit Plans which could subject the Company or its
subsidiaries to any penalty or tax imposed under Section 502(i) of ERISA or
Section 4975 of the Code other than a de minimis penalty or tax. Neither the
----------
Company nor any Company ERISA Affiliate has any obligation to contribute to, or
has had within the six-year period ending on the date hereof, any obligation to
or has actually contributed to, any multiemployer plan. Neither the Company nor
any Company ERISA Affiliate has engaged in any transaction described in Section
4069 of ERISA within the five-year period ending on the date hereof.
SECTION 5.9. TAKEOVER PROVISIONS INAPPLICABLE. Assuming the accuracy
of the representation of Parent set forth in Section 4.12, as of the date hereof
and at all times on or prior to the Effective Date, Section 203 of the DGCL is,
and shall be, inapplicable to the Merger and the transactions contemplated by
this Merger Agreement, the approval of the execution and delivery of the Stock
Option Agreement.
20
<PAGE>
SECTION 5.10. COMPANY ACTION. The Board of Directors of the Company
(at a meeting duly called and held) has by the unanimous vote of all directors
present with no abstentions (a) determined that the Merger is advisable and fair
and in the best interests of the Company and its stockholders, (b) approved the
Merger in accordance with the provisions of Section 251 of the DGCL, (c)
recommended the approval of this Merger Agreement and the Merger by the holders
of the Company Common Stock and directed that the Merger be submitted for
consideration by the Company's stockholders at the Company Meeting, (d) taken
all necessary steps to render Section 203 of the DGCL inapplicable to the Merger
and the transactions contemplated by this Merger Agreement (assuming the
accuracy of the representation of Parent set forth in Section 4.12), and (e)
adopted a resolution having the effect of causing the Company not to be subject,
to the extent permitted by applicable law, to any state takeover law that may
purport to be applicable to the Merger and the transactions contemplated by this
Merger Agreement.
SECTION 5.11. FAIRNESS OPINION. The Company has received the written
opinion of Goldman, Sachs & Co., financial advisor to the Company dated no later
than the date hereof, to the effect that the Exchange Ratio is fair to the
stockholders of the Company.
SECTION 5.12. NO BROKERS. (i) Except as set forth in Section 5.12 of
the Company Disclosure Letter and for Goldman, Sachs & Co., no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or the transactions contemplated by
this Merger Agreement based upon arrangements made by or on behalf of the
Company, and (ii) the fees and commissions payable as contemplated by this
Section 5.12.
ARTICLE VI.
REPRESENTATIONS AND WARRANTIES REGARDING SUB
Parent and Sub jointly and severally represent and warrant to the
Company as follows:
SECTION 6.1. ORGANIZATION. Sub is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Sub was incorporated on March 27, 1996. Except as related to the Merger, this
Merger Agreement and the consummation of the transactions contemplated hereby,
Sub has not engaged in any business or activities (other than certain
organizational matters) or incurred any commitments or liabilities since it was
incorporated.
SECTION 6.2. CAPITALIZATION. The authorized capital stock of Sub
consists of 1,000 shares of Common Stock, par value $0.01 per share, 100 shares
of which are validly issued and
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outstanding, fully paid and nonassessable and, except as disclosed in Section
6.2 of the Parent Disclosure Letter, are owned by Parent free and clear of all
Encumbrances.
SECTION 6.3. AUTHORITY RELATIVE TO THIS MERGER AGREEMENT. Sub has the
corporate power to enter into this Merger Agreement and to carry out its
obligations hereunder. The execution and delivery of this Merger Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by its Board of Directors and sole stockholder, and no other
corporate proceedings on the part of Sub are necessary to authorize this Merger
Agreement and the transactions contemplated hereby. Except as referred to
herein or in connection, or in compliance, with the provisions of the HSR Act,
the Securities Act, the Exchange Act and the corporation, securities or blue sky
laws or regulations of the various states, no filing or registration with, or
authorization, consent or approval of, any Governmental Entity is necessary for
the consummation by Sub of the Merger or the transactions contemplated by this
Merger Agreement, other than filings, registrations, authorizations, consents or
approvals the failure to make or obtain would not prevent the consummation of
the transactions contemplated hereby.
ARTICLE VII.
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 7.1. CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER.
Prior to the Effective Date, unless Parent shall otherwise agree in writing:
(a) the Company shall, and shall cause its subsidiaries to, carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, and shall, and shall
cause its subsidiaries to, use all reasonable efforts to preserve intact
their present business organizations, keep available the services of their
present officers and employees and preserve their relationships with
customers, suppliers and others having business dealings with them to the
end that their goodwill and on-going businesses shall be unimpaired at the
Effective Date, except such impairment as would not have a Company Material
Adverse Effect. The Company shall, and shall cause its subsidiaries to,
(a) maintain insurance coverages and its books, accounts and records in the
usual manner consistent with prior practices; (b) comply in all material
respects with all laws, ordinances and regulations of Governmental Entities
applicable to the Company and its subsidiaries; (c) maintain and keep its
properties and equipment in good repair, working order and condition,
ordinary wear and tear excepted; and (d) perform in all material respects
its obligations under all contracts and
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commitments to which it is a party or by which it is bound, in each case
other than where the failure to so maintain, comply or perform, either
individually or in the aggregate, would result in a Company Material
Adverse Effect;
(b) except as required by this Merger Agreement the Company shall not
and shall not propose to (A) sell or pledge or agree to sell or pledge any
capital stock owned by it in any of its subsidiaries, (B) amend its
Certificate of Incorporation or By-laws, (C) split, combine or reclassify
its outstanding capital stock, or declare, set aside or pay any dividend or
other distribution payable in cash, stock or property, or (D) directly or
indirectly redeem, purchase or otherwise acquire or agree to redeem,
purchase or otherwise acquire any shares of capital stock of the Company
except for the repurchase at cost of shares of Company Common Stock from
employees, consultants or directors of the Company upon termination of
their relationship with the Company in accordance with existing contractual
rights of repurchase in favor of the Company;
(c) the Company shall not, nor shall it permit any of its subsidiaries
to, (A) except as required by this Merger Agreement, issue, propose to
issue, deliver or sell or agree to issue, deliver or sell any additional
shares of, or rights of any kind to acquire any shares of, its capital
stock of any class, any option, rights or warrants to acquire, or
securities convertible into, shares of capital stock other than issuances
of options to purchase Company Common Stock under the Stock Option Plans on
or after the date of this Merger Agreement to employees of the Company or
its subsidiaries (including subsidiaries acquired or formed on or after the
date of this Merger Agreement) in the ordinary course of business and
consistent with past practice, other than to such employees who are
executive officers of the Company ("Permitted Options") or issuances of
-----------------
Company Common Stock pursuant to the Proposed Transactions, the Stock
Purchase Plan or the exercise of options outstanding on the date of this
Merger Agreement or Permitted Options; (B) acquire, lease or dispose or
agree to acquire, lease or dispose of any capital assets or any other
assets other than (i) in the ordinary course of business or (ii) in
connection with any additional deployment or expansion of network
infrastructure requested by MS; (C) incur additional Indebtedness or
encumber or grant a security interest in any asset or enter into any other
material transaction other than in each case (i) in the ordinary course of
business, (ii) pursuant to any extension of credit by MS, or (iii) pursuant
to credit facilities in an aggregate amount not to exceed $40,000,000; (D)
acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in, or by any other manner, any
business or any corporation, partnership,
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association or other business organization or division thereof, in each
case in this Clause (D) which are material, individually or in the
aggregate, to the Company and its subsidiaries taken as a whole, except
that the Company may acquire or create new wholly owned subsidiaries in the
ordinary course of business and as contemplated by the Proposed
Transactions; (E) authorize any capital expenditures in excess of the
Company's 1996 capital expenditure budget provided to Parent prior to the
date hereof, except for capital expenditures funded by an increase in
credit facilities with MS; or (F) enter into any contract, agreement,
commitment or arrangement with respect to any of the foregoing;
(d) except as disclosed in the Company Disclosure Letter, the Company
shall not, nor shall it permit, any of its subsidiaries to, except as
required to comply with applicable law and except as provided in Section
3.5 hereof, (A) adopt, enter into, terminate or amend any bonus, profit
sharing, compensation, severance, termination, stock option, pension,
retirement, deferred compensation, employment or other Company Benefit
Plan, agreement, trust, fund or other arrangement for the benefit or
welfare of any director, officer or current or former employee, other than
in the ordinary course of business consistent with past practice (B)
increase in any manner the compensation or fringe benefit of any director,
officer or employee (except for normal increases in the ordinary course of
business that are consistent with past practice and that, in the aggregate,
do not result in a material increase in benefits or compensation expense to
the Company and its subsidiaries relative to the level in effect prior to
such amendment and except for increases pursuant to the Company's pending
1996 salary increases in an aggregate amount not to exceed 15% of the base
salary of current employees, (C) pay any benefit not provided under any
existing plan or arrangement, (D) grant any awards under any bonus,
incentive, performance or other compensation plan or arrangement or Company
Benefit Plan (including, without limitation, the grant of stock options,
stock appreciation rights, stock based or stock related awards, performance
units or restricted stock, or the removal of existing restrictions in any
benefit plans or agreements or awards made thereunder) (other than such
plans and arrangements (other than stock options) which are made in the
ordinary course of business consistent with past practice, including
Permitted Options), (E) take any action to fund or in any other way secure
the payment of compensation or benefits under any employee plan, agreement,
contract or arrangement or Company Benefit Plan other than in the ordinary
course of business consistent with past practice, or (F) adopt, enter into,
amend or terminate any contract, agreement, commitment or arrangement to do
any of the foregoing;
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(e) except as set forth on Section 7.1(e) of the Company Disclosure
Letter, the Company shall not, nor shall it permit any of its subsidiaries
to, make any investments in non-investment grade securities exceeding
$1,000,000; provided, however, that the Company will be permitted to create
-------- -------
new wholly owned subsidiaries in the ordinary course of business or
pursuant to the Proposed Transactions.
(f) the Company shall not, nor shall it permit any of its subsidiaries
to, take or cause to be taken any action (other than in the ordinary course
of business consistent with past practices), with respect to accounting
policies or procedures (including, without limitation, procedures with
respect to the payment of accounts payable and collection of accounts
receivable);
(g) the Company shall prepare and file all tax returns required to be
filed with respect to the Company and its subsidiaries (or any of them)
after the date of this Merger Agreement and on or before the Effective Date
in a timely manner, and in a manner consistent with prior years and
applicable laws and regulations other than such tax returns for which the
failure to file would not have a Company Material Adverse Effect; and
(h) the Company shall file with the Commission all reports required to
be filed under the Exchange Act on or prior to the date each such report is
due and all such reports shall comply in all material respects with the
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder applicable to such reports and, upon such filing,
shall not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. The unaudited interim financial statements of the
Company included in such reports shall comply as to form in all material
respects with applicable accounting requirements and with the published
rules and regulations of the Commission with respect thereto and shall be
prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as may be indicated therein or in the
notes thereto), shall present fairly, in all material respects, the
financial position of the Company and its subsidiaries as at the dates
thereof and the results of their operations and cash flows for the periods
then ended subject to normal year-end audit adjustments, any other
adjustments described therein and the fact that certain information and
notes shall be condensed or omitted in accordance with the Exchange Act and
the rules and regulations promulgated thereunder, and shall be in all
material respects, in accordance with the books of account and records of
the Company.
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SECTION 7.2. CONDUCT OF BUSINESS BY PARENT PENDING THE MERGER. Prior
to the Effective Date, unless the Company shall otherwise agree in writing or
except as otherwise required by this Merger Agreement, Parent shall, and shall
cause its subsidiaries to, carry on their respective businesses in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted, and shall, and shall cause its subsidiaries to, use all reasonable
efforts to preserve intact their present business organizations, keep available
the services of their present officers and employees and preserve their
relationships with customers, suppliers and others having business dealings with
them to the end that their goodwill and on-going businesses shall be unimpaired
at the Effective Date. From the date of this Merger Agreement through the
Effective Date. From the date of this Merger Agreement through the Effective
Date, Parent shall not pay or declare any dividend or make any distribution with
respect to the Parent Common Stock, other than the events contemplated by
Section 3.1(c).
SECTION 7.3. CONDUCT OF BUSINESS OF SUB. During the period from the
date of this Merger Agreement to the Effective Date, Sub shall not engage in any
activities of any nature except as provided in or contemplated by this Merger
Agreement.
SECTION 7.4. NOTICE OF BREACH. Each party shall promptly give written
notice to the other party upon becoming aware of the occurrence or, to its best
knowledge, impending or threatened occurrence, of any event which would cause or
constitute a breach of any of its representations, warranties or covenants
contained or referenced in this Merger Agreement and will use all reasonable
efforts to prevent or promptly remedy the same. Any such notification shall not
be deemed an amendment of the Company Disclosure Letter or the Parent Disclosure
Letter.
ARTICLE VIII.
ADDITIONAL AGREEMENTS
SECTION 8.1. ACCESS AND INFORMATION. Each of the Company and Parent
and their respective subsidiaries shall afford to the other and to the other's
accountants, counsel and other representatives full access during normal
business hours after reasonable notice (and at such other times as the parties
may mutually agree) throughout the period prior to the Effective Date to all of
its properties, books, contracts, commitments, records and personnel and, during
such period, each shall furnish promptly to the other (i) a copy of each report,
schedule and other document filed or received by it pursuant to the requirements
of Federal or state securities laws, and (ii) all other information concerning
its business, properties and personnel as the other may reasonably request.
Each of the Company and Parent shall hold, and shall cause their respective
employees and agents to hold, in confidence all such information
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in accordance with the terms of the Confidentiality Agreement dated March 5,
1996 between Parent and the Company.
SECTION 8.2. REGISTRATION STATEMENT/PROXY STATEMENT. Parent and the
Company shall cooperate and promptly prepare and Parent shall file with the
Commission as soon as practicable a Registration Statement of Form S-4 (the
"Form S-4") under the Securities Act, with respect to the Parent Common Stock
- ---------
issuable in the Merger, a portion of which Registration Statement shall also
serve as the joint proxy statement with respect to the Company Meeting and the
Parent Meeting (the "Proxy Statement/Prospectus"). The respective parties will
--------------------------
cause the Proxy Statement/Prospectus and the Form S-4 to comply as to form in
all material respects with the applicable provisions of the Securities Act, the
Exchange Act and the rules and regulations thereunder. Parent shall use all
reasonable efforts, and the Company will cooperate with Parent, to have the Form
S-4 declared effective by the Commission as promptly as practicable and to keep
the Form S-4 effective as long as is necessary to consummate the Merger. Parent
shall, as promptly as practicable, provide copies of any written comments
received from the Commission with respect to the Form S-4 to the Company and
advise the Company of any verbal comments with respect to the Form S-4 received
from the Commission. Parent shall use its best efforts to obtain, prior to the
effective date of the Form S-4, all necessary state securities law or "Blue Sky"
permits or approvals required to carry out the transactions contemplated by the
Merger Agreement and will pay all expenses incident thereto. Parent agrees that
the Proxy Statement/Prospectus and each amendment or supplement thereto at the
time of mailing thereof and at the time of the Company Meeting and the Parent
Meeting, or, in the case of the Form S-4 and each amendment or supplement
thereto, at the time it is filed or becomes effective, will not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
-------- -------
that the foregoing shall not apply to the extent that any such untrue statement
of a material fact or omission to state a material fact was made by Parent in
reliance upon and in conformity with written information concerning the Company
furnished to Parent by the Company specifically for use in the Proxy
Statement/Prospectus. The Company agrees that the written information
concerning the Company provided by it for inclusion in the Proxy
Statement/Prospectus and each amendment or supplement thereto, at the time of
mailing thereof and at the time of the Company Meeting and the Parent Meeting,
or, in the case of written information concerning the Company provided by the
Company for inclusion in the Form S-4 or any amendment or supplement thereto, at
the time it is filed or becomes effective, will not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which
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they were made, not misleading. No amendment or supplement to the Proxy
Statement/Prospectus will be made by Parent or the Company without the approval
of the other party. Parent will advise the Company, promptly after it receives
notice thereof, of the time when the Form S-4 has become effective or any
supplement or amendment has been filed, the issuance of any stop order, the
suspension of the qualification of Parent Common Stock issuable in connection
with the Merger for offering or sale in any jurisdiction, or any request by the
Commission for amendment of the Proxy Statement/Prospectus or the Form S-4 or
comments thereon and responses thereto or requests by the Commission for
additional information. At the effective date of the registration statement on
Form S-4, all of the Parent Common Stock to be issued in the Merger shall be
covered by such registration statement.
SECTION 8.3. COMPLIANCE WITH THE SECURITIES ACT. At least 30 days
prior to the Closing Date, the Company shall deliver to Parent a list of names
and addresses of those persons who were, in the Company's reasonable judgment,
at the record date for the Company Meeting, "affiliates" (each such person, an
"Affiliate") of the Company within the meaning of Rule 145 of the rules and
- ----------
regulations promulgated under the Securities Act. The Company shall use all
reasonable efforts to deliver or cause to be delivered to Parent, prior to the
Effective Date, from each of the Affiliates of the Company identified in the
foregoing list, an Affiliate Letter in the form attached hereto as Exhibit 8.3.
Parent shall be entitled to place legends as specified in such Affiliate Letters
on the certificates evidencing any Parent Company Common Stock to be received by
such Affiliates pursuant to the terms of the Merger Agreement, and to issue
appropriate stop transfer instructions to the transfer agent for the Parent
Company Common Stock, consistent with the terms of such Affiliate Letters.
SECTION 8.4. LISTING. Parent shall use its best efforts to include on
Nasdaq, upon official notice of issuance, the Parent Common Stock to be issued
pursuant to the Merger.
SECTION 8.5. INDEMNIFICATION.
The By-laws and the Certificate of Incorporation of the Surviving
Corporation shall be amended prior to the Effective Date to contain
provisions identical with respect to indemnification to those set forth in
the By-laws and the Certificate of Incorporation of the Company as in
effect on the date of this Merger Agreement, which provisions of the By-
laws and the Certificate of Incorporation of the Surviving Corporation
shall not be amended, repealed or otherwise modified for a period of six
years after the Effective Date in any manner that would adversely affect
the rights thereunder of individuals who immediately prior to the Effective
Date were directors, officers, agents or
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employees of the Company. Parent and the Surviving Corporation shall
jointly and severally indemnify, defend and hold harmless the directors,
officers and agents of the Company as provided in the Company's Certificate
of Incorporation, By-Laws or indemnification agreements, as in effect as of
the date hereof, with respect to matters occurring through the Effective
Date. Parent agrees to cause Surviving Corporation to maintain in effect
for not less than three years after the Effective Date the current policies
of directors' and officers' liability insurance maintained by the Company
with respect to matters occurring prior to the Effective Date; provided,
--------
however, that (i) the Surviving Corporation may substitute therefor
-------
policies of at least the same coverage (with carriers comparable to the
Company's existing carriers) containing terms and conditions which are no
less advantageous to the officers, directors and employees of the Company
and (ii) the Surviving Corporation shall not be required to pay an annual
premium for such insurance in excess of three times the last annual premium
paid prior to the date hereof, but in such case shall purchase as much
coverage as possible for such amount.
(b) The Company's Board of Directors has consulted with financial and
legal advisors in connection with the execution, delivery and performance
by the Company of this Merger Agreement and the approval for purposes of
Section 203 of the DGCL, the transactions contemplated by the execution and
delivery of a Stock Option Agreement by certain members of the Company's
Board of Directors or an affiliate or employer of certain members of the
Company's Board of Directors, and the Company's Board of Directors believes
that the members of the Company's Board of Directors have complied with
their fiduciary duties under Delaware law and that there is no pending or,
to the best knowledge of the Company, threatened suit, action or proceeding
against the Company or any member of the Company's Board of Directors
asserting a claim that the Company's Board of Directors or any individual
member of the Company's Board of Directors did not comply with its or his
fiduciary duties under Delaware law.
(c) In reliance upon the representations in paragraph (b), Parent
agrees to indemnify, defend and hold harmless each member of the Company's
Board of Directors that has executed and delivered, or whose affiliate or
employer has executed and delivered, a Stock Option Agreement (each an
"Indemnified Party") against any loss, claim, damage, liability or expense,
------------------
to which such Indemnified Party may become subject, insofar, but only
insofar, as such loss, claim, damage, liability or expense arises solely
out of, or is based solely upon, a claim that an Indemnified Party's
fiduciary duty as a member of the Company's Board of Directors under
Delaware law was breached by the execution
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and delivery by him, or his affiliate or employer, in his or its capacity
as a stockholder of the Company, of a Stock Option Agreement (a "Claim").
-----
Should a court of competent jurisdiction award damages against any
Indemnified Party without specifying the portion thereof allocable solely
to the matters referred to in the preceding sentence, the Parent and the
Company shall petition such court to make such allocation. If the court
refuses to do so, the Parent and the Company shall negotiate in good faith
to reach an agreement with respect to such allocation.
(d) Notwithstanding the provisions of paragraph (c) above, Parent
shall have no obligation to indemnify, defend and hold harmless any
Indemnified Party pursuant to paragraph (c) unless: (i) the representations
contained in paragraph (b) above are true and (ii) neither the Indemnified
Party nor any affiliate or employer of the Indemnified Party is a party to
a Claim; provided that if the Company is the beneficiary of any Claim, the
--------
amount that such Indemnified Party is entitled to receive pursuant to
paragraph (c) shall be reduced by an amount equal to the pro rata amount of
such Claim paid to the Company, indirectly attributable to the Indemnified
Party by reason of its stockholdings in the Company. In addition, Parent's
obligation to indemnify, defend and hold harmless any Indemnified Party
shall be reduced by and to the extent that (i) such Indemnified Party is
indemnified pursuant to the Company's By-laws and (ii) such Indemnified
Party is indemnified from, or receive proceeds of, any insurance policy
applicable to a Claim. Each Indemnified Party shall make any and all
claims pursuant to the Company's By-laws with respect to seeking
indemnification for a Claim and shall file any and all claims under such
insurance policy with respect to a Claim and use its reasonable efforts to
file any and all claims under such By-law provisions and insurance policy
on a timely basis. If Parent shall release an Indemnified Party from its
obligations under the Stock Option Agreement prior to the use of the Proxy
granted therein at the Company Meeting or the exercise of the option
contemplated by the Stock Option Agreement, Parent shall have no obligation
to indemnify, defend and hold harmless such Indemnified Party for loss
claim, damage, liability or expense incurred after such release.
(e) If any Claim shall be brought against an Indemnified Party,
Parent shall assume the defense thereof with counsel of its selection, and
shall have absolute discretion to settle any Claims, and each Indemnified
Party shall cooperate with the defense or settlement thereof. After Parent
has assumed the defense of such claim, Parent shall not be liable to the
Indemnified Party under this Section 8.5 for any legal or other expenses
subsequently
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incurred by the Indemnified Party in connection with the defense thereof.
SECTION 8.6. HSR ACT. The Company and Parent shall use their best
efforts to file as soon as practicable notifications under the HSR Act in
connection with the Merger and the transactions contemplated hereby, and to
respond as promptly as practicable to any inquiries received from the Federal
Trade Commission and the Antitrust Division of the Department of Justice for
additional information or documentation and to respond as promptly as
practicable to all inquiries and requests received from any State Attorney
General or other governmental authority in connection with antitrust matters.
SECTION 8.7. ADDITIONAL AGREEMENTS.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto agrees to use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Merger Agreement,
including using all reasonable efforts to obtain all necessary waivers,
consents and approvals, to effect all necessary registrations and filings
(including, but not limited to, filings under the HSR Act and with all
applicable Governmental Entities) and to lift any injunction or other legal
bar to the Merger (and, in such case, to proceed with the Merger as
expeditiously as possible), subject, however, in the case of the Merger
Agreement and the Parent Share Proposal, to the appropriate vote of the
stockholders of the Company and Parent. Notwithstanding the foregoing,
there shall be no action required to be taken and no action will be taken
in order to consummate and make effective the transactions contemplated by
this Merger Agreement if such action, either alone or together with another
action, would result in a Company Material Adverse Effect or a Parent
Material Adverse Effect.
(b) In case at any time after the Effective Date any further action
is necessary or desirable to carry out the purposes of this Merger
Agreement, the proper officers and/or directors of Parent, the Company and
the Surviving Corporation shall take all such necessary action.
(c) Following the Effective Date, Parent shall use its best efforts
to conduct the business, and shall cause the Surviving Corporation to use
its best efforts to conduct its business, except as otherwise contemplated
by this Merger Agreement, in a manner which would not jeopardize the
characterization of the Merger as a reorganization within the meaning of
Section 368(a) of the Code.
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SECTION 8.8. NO SOLICITATION. Neither the Company nor any of its
subsidiaries shall, directly or indirectly, take (nor shall the Company
authorize or permit its subsidiaries, officers, directors, employees,
representatives, investment bankers, attorneys, accountants or other agents or
affiliates, to take) any action to (i) encourage, solicit or initiate the
submission of any Acquisition Proposal, (ii) enter into any agreement with
respect to any Acquisition Proposal or (iii) participate in any way in
discussions or negotiations with, or furnish any information to, any person in
connection with, or take any other action to facilitate any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to lead
to, any Acquisition Proposal; provided, however, that nothing contained in this
-----------------
Merger Agreement shall prevent the Company or its Board of Directors from (A)
furnishing non-public information to, or entering into discussions with any
person or entity in connection with an unsolicited bona fide written Acquisition
Proposal by such person or entity (including a new and unsolicited Acquisition
Proposal received by the Company after the execution of this Merger Agreement
from a person or entity whose initial contact with the Company may have been
solicited by the Company prior to the execution of this Merger Agreement) if
prior to furnishing such non-public information to, or entering into discussions
or negotiations with, such person or entity, such Board of Directors receives
from such person or entity an executed confidentiality agreement or, (B)
withdrawing the Company's Board of Directors' recommendation of the Merger
Agreement, if and only to the extent that the Company's Board of Directors
believes in good faith (after consultation with and based upon the advice of its
financial advisor) that such Acquisition Proposal would, if consummated, result
in a transaction more favorable to the Company's stockholders than the Merger
and the Board of Directors of the Company determines in good faith after
consultation with and based upon a written opinion of its outside legal counsel
that such withdrawal is necessary for the directors to comply with their
fiduciary duties to the stockholders under applicable Delaware law and that such
withdrawal will not affect the validity of the submission of the Merger
Agreement to the stockholders of the Company pursuant to Delaware law or the
enforceability of the Stock Option Agreement; or (B) complying with Rule 14e-
2(a)(2) or (3) promulgated under the Exchange Act with regard to an Acquisition
Proposal. The Company will promptly communicate to Parent any solicitation by
the Company and the terms of any proposal or inquiry, including the identity of
the person and its affiliates making the same, that it may receive in respect of
any such transaction, or of any such information requested from it or of any
such negotiations or discussions being sought to be initiated with it.
"Acquisition Proposal" shall mean any proposed (A) merger, consolidation or
- ---------------------
similar transaction involving the Company, (B) sale, lease or other disposition
directly or indirectly by merger, consolidation, share exchange or otherwise of
assets of the Company or its subsidiaries representing 10% or more of the
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consolidated assets of the Company and its subsidiaries, (C) issue, sale, or
other disposition of (including by way of merger, consolidation, share exchange
or any similar transaction) securities (or options, rights or warrants to
purchase, or securities convertible into or exchangeable for, such securities)
representing 10% or more of the voting power of the Company or (D) transaction
in which any person shall acquire beneficial ownership (as such term is defined
in Rule 13d-3 under the Exchange Act), or the right to acquire beneficial
ownership or any "group" (as such term is defined under the Exchange Act) shall
have been formed which beneficially owns or has the right to acquire beneficial
ownership of 25% or more of the outstanding Company Common Stock.
SECTION 8.9. LIMITATION ON ACQUISITION ACTIVITIES. From the date of
the Merger Agreement until the Effective Date, Parent shall not participate in
any way in discussions or negotiations with, or enter into any agreement
pursuant to which Parent would acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in, or by any
other manner, any business or any corporation, partnership, association or other
business organization or division thereof, in which case either (i) the acquired
business or entity is in the business of providing Internet access, (ii) the
acquisition would involve aggregate consideration in excess of $500,000,000, or
(iii) the acquisition could reasonably be expected to delay the satisfaction of
the conditions set forth in Article IX hereof.
SECTION 8.10. NOTICE OF ACTIONS. From the date of the Merger Agreement
until the Effective Date, each party shall promptly notify the other party in
writing of any pending or, to the best knowledge of the first party, threatened
action, proceeding or investigation by any Governmental Entity or any other
person (i) challenging or seeking material damages in connection with the Merger
or the conversion of the Company Common Stock into Parent Common Stock pursuant
to the Merger or (ii) seeking to restrain or prohibit the consummation of the
Merger or otherwise limit the right of Parent or, to the best knowledge of such
party, Parent's subsidiaries to own or operate all or any portion of the
businesses or assets of the Company, which in either case is reasonably likely
to have a Company Material Adverse Effect prior to or after the Effective Date,
or a Parent Material Adverse Effect after the Effective Date.
SECTION 8.11. BENEFIT PLANS GENERALLY. Parent agrees to honor in
accordance with their terms all employment, severance and similar agreements to
which the Company or any subsidiary is a party and all accrued benefits that are
vested as of the Effective Date under any Company Benefit Plan or Stock Option
Plan, except as provided by the terms thereof. Parent agrees to provide
employees of the Company and its subsidiaries with credit for all service with
the Company or its affiliates for purposes
33
<PAGE>
of vesting and eligibility under any employee benefit plan, program or
arrangement of Parent or its affiliates, including all employee equity incentive
programs of Parent. To the extent not otherwise specified in this Merger
Agreement, Parent agrees that employees of the Company and its subsidiaries who
continue to be employed by the Company or its subsidiaries after the Effective
Date may continue to participate in their current Company sponsored employee
benefit programs through twelve months following the Effective Date. After the
Effective Date, the employees of the Company and its subsidiaries shall be
eligible to participate in the appropriate employee equity incentive programs of
Parent, as determined by Parent in its sole discretion.
SECTION 8.12. STOCKHOLDERS' RIGHTS PLAN. From the date of this Merger
Agreement until the expiration or termination of the Stock Option Agreement, the
Company shall not amend its certificate of incorporation or otherwise take
action to provide for the issuance of securities pursuant to a stockholder
rights plan or any similar program or plan.
ARTICLE IX.
CONDITIONS PRECEDENT
SECTION 9.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Date of the following
conditions:
(a) This Merger Agreement and the transactions contemplated hereby shall
have been approved and adopted by the requisite vote of the holders of the
Company Common Stock.
(b) The Parent Share Proposal shall have been approved by the requisite
vote of the holders of the Parent capital stock.
(c) The Parent Common Stock issuable in the Merger shall have been
authorized for inclusion in Nasdaq upon official notice of issuance.
(d) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(e) The Registration Statement shall have become effective in accordance
with the provisions of the Securities Act. No stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
Commission and remain in effect and all necessary approvals under state
securities laws relating to the issuance or
34
<PAGE>
trading of the Parent Common Stock to be issued to the Company stockholders
in connection with the Merger shall have been received.
(f) No preliminary or permanent injunction or other order by any Federal
or state court in the United States which prevents the consummation of the
Merger shall have been issued and remain in effect (each party agreeing to
use its best efforts to have any such injunction lifted).
SECTION 9.2. CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE
MERGER. The obligation of the Company to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Date of the additional following
conditions, unless waived by the Company:
(a) Parent and Sub shall have performed in all material respects their
agreements contained in this Merger Agreement required to be performed on
or prior to the Effective Date and the representations and warranties of
Parent and Sub contained in this Merger Agreement shall be true in all
material respects when made and on and as of the Effective Date as if made
on and as of such date (except to the extent they relate to a particular
date), and the Company shall have received a certificate of the President
or Chief Executive Officer or a Vice President of Parent and Sub to that
effect.
(b) The Company shall have received an opinion dated the Effective Date
from Heller Ehrman White & McAuliffe, counsel to the Company, that, based
upon certain factual representations of the Company, Parent and Sub
reasonably requested by such counsel, the Merger will be treated as a
reorganization within the meaning of Section 368(a).
(c) All permits, consents, authorizations, approvals, registrations,
qualifications, designations and declarations set forth in Section 4.4 of
the Parent Disclosure Letter shall have been obtained, and all filings and
notices set forth in Section 4.4 of the Parent Disclosure Letter shall have
been submitted by Parent.
(d) Parent shall have taken all action necessary to cause Mr. John W.
Sidgmore and up to two additional individuals designated by the Company and
acceptable to Parent, to become members of the Board of Directors of Parent
subject to the consummation of the Merger.
SECTION 9.3. CONDITIONS TO OBLIGATIONS OF PARENT AND SUB TO EFFECT THE
MERGER. The obligations of Parent and Sub to effect the Merger shall be subject
to the fulfillment at or prior to the Effective Date of the additional following
conditions, unless waived by Parent:
35
<PAGE>
(a) The Company shall have performed in all material respects its
agreements contained in this Merger Agreement required to be performed on
or prior to the Effective Date and the representations and warranties of
the Company contained in this Merger Agreement shall be true in all
material respects when made and on and as of the Effective Date as if made
on and as of such date (except to the extent they relate to a particular
date), except as contemplated or permitted by this Merger Agreement, and
Parent and Sub shall have received a certificate of the President or Chief
Executive Officer or a Vice President of the Company to that effect.
(b) Parent shall have received an opinion of counsel to Parent that, the
Merger will be treated as a reorganization within the meaning of Section
368(a) of the Code, and that the Company, Parent and Sub will each be a
party to that reorganization within the meaning of Section 368(b) of the
Code.
(c) All permits, consents, authorizations, approvals, registrations,
qualifications, designations and declarations set forth in Section 5.4 of
the Company Disclosure Letter shall have been obtained and to the extent
required to be submitted prior to the Effective Date, all filings and
notices set forth in Section 5.4 of the Company Disclosure Letter shall
have been submitted by the Company.
(d) Parent shall have received the Affiliate Letters.
ARTICLE X.
TERMINATION, AMENDMENT AND WAIVER
SECTION 10.1. TERMINATION. This Merger Agreement may be terminated at
any time prior to the Effective Date, whether before or after approval by the
stockholders of the Company:
(a) by mutual consent of the Board of Directors of Parent and the Board
of Directors of the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated on or before November 30, 1996 (provided the terminating party
is not otherwise in material breach of its representations, warranties or
obligations under this Merger Agreement);
(c) by the Company if any of the conditions specified in Sections 9.1
and 9.2 have not been met or waived by the Company at such time as such
condition is no longer capable of satisfaction;
36
<PAGE>
(d) by Parent if any of the conditions specified in Sections 9.1 and 9.3
have not been met or waived by Parent at such time as such condition is no
longer capable of satisfaction;
(e) by Parent if any of the following shall have occurred (each, a
"Purchase Event"):
---------------
(i) any person (other than Parent or any subsidiary of Parent)
shall have commenced (as such term is defined in Rule 14d-2 under the
Exchange Act), a tender offer or exchange offer to purchase any shares
of Company Common Stock such that, upon consummation of such offer,
such person would own or control 50% or more of the then outstanding
Company Common Stock, and the Board of Directors of the Company,
within ten business days after such tender or exchange offer shall
have been so commenced, fails to recommend against acceptance of such
tender or exchange offer by its stockholders, and Parent shall deliver
a written notice of termination to the Company within 20 business days
after the expiration of such 10 day period;
(ii) the Company or any subsidiary of the Company shall have
authorized, recommended, proposed or publicly announced an intention
to authorize, recommend or propose, or entered into, an agreement with
any person (other than Parent or any subsidiary of Parent) to (A)
effect a merger, consolidation or similar transaction involving the
Company or any of its material subsidiaries, (B) sell, lease or
otherwise dispose of assets of the Company or its subsidiaries
representing 10% or more of the consolidated assets of the Company and
its subsidiaries (other than in the ordinary course of business) or
(C) issue, sell or otherwise dispose of (including by way of merger,
consolidation, share exchange or any similar transaction) securities
(or options, rights or warrants to purchase, or securities convertible
into, such securities) representing 10% or more of the voting power of
the Company or any of its subsidiaries;
(iii) any person (other than Parent, any subsidiary of Parent or the
Company or any of its subsidiaries in a fiduciary capacity) shall have
acquired beneficial ownership (as such term is defined in Rule 13d-3
under the Exchange Act) or the right to acquire beneficial ownership
of, or any "group" (as such term is defined under the Exchange Act)
shall have been formed which beneficially owns or has the right to
acquire beneficial ownership of, 25% or more of the then outstanding
Company Common Stock; or
37
<PAGE>
(f) by either Parent or the Company if the approval of the Company's
stockholders required by Section 9.1(a) shall not have been obtained at the
Company Meeting; or
(g) by either Parent or the Company if the approval of Parent's
stockholders required by Section 9.1(b) shall not have been obtained at the
Parent Meeting.
SECTION 10.2. EFFECT OF TERMINATION. In the event of termination of
this Merger Agreement by either Parent or the Company, as provided above, this
Merger Agreement shall forthwith become void and (except for the willful breach
of this Merger Agreement by any party hereto) there shall be no liability on the
part of either the Company, Parent or Sub or their respective officers,
directors, employees or agents; provided that the last sentence of Section 8.1
--------
and Sections 8.5, 8.6, 8.12, 10.2 and Article XI (other than Section 11.4) shall
survive the termination.
SECTION 10.3. AMENDMENT. This Merger Agreement may be amended by the
parties hereto, by or pursuant to action taken by their respective Boards of
Directors, at any time before or after approval hereof by the stockholders of
the Company and Parent, but, after such approval, no amendment shall be made
which changes the ratios at which Company Common Stock is to be converted into
Parent Common Stock as provided in Section 3.1 or which in any way materially
adversely affects the rights of such stockholders, without the further approval
of such stockholders. This Merger Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
SECTION 10.4. EXTENSION; WAIVERS. At any time prior to the Effective
Date, the parties hereto, by or pursuant to action taken by their respective
Boards of Directors, may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
documents delivered pursuant hereto and (iii) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid if set forth in an
instrument in writing signed on behalf of such party.
ARTICLE XI.
GENERAL PROVISIONS
SECTION 11.1. NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. All representations and warranties set forth in the Merger
Agreement shall terminate at the Effective Date. All covenants and agreements
set forth in the Merger Agreement shall survive in accordance with their terms.
38
<PAGE>
SECTION 11.2. NOTICES. All notices or other communications under this
Merger Agreement shall be in writing and shall be given by delivery in person,
by facsimile, cable, telegram, telex or other standard form of
telecommunications, or by registered or certified mail, postage prepaid, return
receipt requested, addressed as follows (or such other address for a party as
shall be specified in a notice given in accordance with this Section 11.2) and
shall be deemed to have been given one business day after transmission by
facsimile, cable, telegram, telex or other standard form of telecommunications
or four days after deposit in the U.S. mail:
If to the Company:
UUNET Technologies, Inc.
3060 William Drive
Fairfax, Virginia 22031
Attention: John W. Sidgmore
Martina W. Knee, Esq.
Facsimile No.: (703) 206-5807
with a copy to:
Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, California 94301
Attention: August J. Moretti, Esq.
and Richard Friedman, Esq.
Facsimile No.: (415) 324-0638
If to Parent or Sub:
Prior to May 18, 1996:
MFS Communications Company, Inc.
3555 Farnam Street, 2nd Floor
Omaha, Nebraska 68131
Attention: General Counsel
Facsimile No.: (402) 977-5335
On or after May 18, 1996:
MFS Communications Company, Inc.
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Attention: General Counsel
Facsimile No.: (402) 231-3545
39
<PAGE>
With a copy to:
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: John S. D'Alimonte, Esq.
Facsimile No.: (212) 821-8111
or to such other address as any party may have furnished to the other parties in
writing in accordance with this Section.
SECTION 11.3. FEES AND EXPENSES.
(a) Whether or not the Merger is consummated, all costs and expenses
incurred in connection with this Merger Agreement and the transactions
contemplated by this Merger Agreement shall be paid by the party incurring
such expenses.
(b) If (i) Parent has terminated this Agreement pursuant to the
provisions of (A) Section 10.1(f) or (B) Section 10.1(d) as such Section
relates to Section 9.3(a) and (ii) within 18-months after the date of such
termination, the Company shall either accept, or recommend to its
stockholders for approval, an Acquisition Proposal that Parent in good
faith believes would, if consummated, result in a transaction more
favorable to the stockholders of the Company than the Merger, the Company
shall pay to Parent a fee of $60,000,000, which amount shall be payable by
wire transfer of immediately available funds within two business days after
the acquisition contemplated by such Acquisition Proposal is consummated.
The obligation of the Company pursuant to this paragraph (b) shall not be
prejudiced by an exercise of termination rights by the Company within five
business days prior to the exercise by Parent of its termination rights
under this Merger Agreement.
(c) If (i) the Company has terminated this Agreement pursuant to the
provisions of (A) Section 10.1(g) or (B) Section 10.1(c) as such Section
relates to Section 9.2(a), Parent shall:
(i) pay to the Company a fee of $60,000,000, which amount shall be
payable by wire transfer of immediately available funds within two
business days after such termination;
(ii) at the option of the Company, purchase from the Company
1,551,724 shares of Company Common Stock (as adjusted for stock
splits, reverse stock splits, stock dividends, recapitalizations and
other similar
40
<PAGE>
events) for an aggregate purchase price of $90,000,000,
which purchase shall take place on the fifth business day following
the later of (A) written notice by the Company to the Parent that a
registration statement under the Securities Act pursuant to which such
shares will be sold to the Parent has been declared effective and (B)
written notice by the Company to the Parent that the waiting period
applicable to such purchase under the HSR Act has expired or has been
terminated; and
(iii) at the option of the Company, commencing on a date to be
mutually agreed upon by the Company and Parent, but in no event later
than 180 days after notification by the Company, provide data
communications services, including private line and local special
access circuits to the Company at Parent's cost for a period of five
years, with an aggregate total value of such circuits not to exceed
$100,000,000, with no more than $25,000,000 in any calendar year, and
the cost of such services to be jointly determined by the parties or
by a mutually acceptable third-party. Parent will provide the Company
with timely network planning information regarding Parent's network
expansions and service availability.
The obligation of Parent pursuant to this paragraph (c) shall not be
prejudiced by an exercise of termination rights by Parent within five
business days prior to the exercise by the Company of its termination
rights under this Merger Agreement.
SECTION 11.4. PUBLICITY. So long as this Merger Agreement is in
effect, Parent, Sub and the Company agree to consult with each other in issuing
any press release or otherwise making any public statement with respect to the
transactions contemplated by this Merger Agreement, and none of them shall issue
any press release or make any public statement relating to the transactions
contemplated hereby prior to such consultation, except as may be required by law
or by obligations pursuant to any listing agreement with Nasdaq. The
commencement of litigation relating to the Merger Agreement or the transactions
contemplated hereby or any proceedings in connection therewith shall not be
deemed a violation of this Section 11.4.
SECTION 11.5. SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Merger Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Merger
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or
41
<PAGE>
any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
SECTION 11.6. ASSIGNMENT; BINDING EFFECT. Neither this Merger
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of law or otherwise)
without the prior written consent of the other parties, except that Sub shall
have the right to assign to Parent or any direct wholly owned subsidiary of
Parent any and all rights and obligations of Sub under this Merger Agreement.
Subject to the preceding sentence, this Merger Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns. Nothing in this Merger Agreement, expressed or implied,
except as specifically set forth in Sections 8.5 or 10.2, is intended to confer
on any person other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Merger Agreement.
SECTION 11.7. ENTIRE AGREEMENT. This Merger Agreement, the Exhibits,
the Company Disclosure Letter, the Parent Disclosure Letter, the Confidentiality
Agreement dated March 5, 1996, between the Company and Parent and any documents
delivered by the parties in connection herewith constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Merger Agreement shall be
binding upon any party hereto unless made in writing and signed by all parties
hereto.
SECTION 11.8. GOVERNING LAW. THIS MERGER AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT
REGARD TO ITS RULES OF CONFLICT OF LAWS.
SECTION 11.9. COUNTERPARTS. This Merger Agreement may be executed by
the parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a
number of copies hereof each signed by less than all, but together signed by all
of the parties hereto.
SECTION 11.10. HEADINGS, TABLE OF CONTENTS, INDEX OF DEFINED TERMS.
Headings of the Articles and Sections of this Merger Agreement, the Table of
Contents and the Index of Defined Terms are for the convenience of the parties
only, and shall be given no substantive or interpretive effect whatsoever.
SECTION 11.11. INTERPRETATION. In this Merger Agreement, unless the
context otherwise requires, words
42
<PAGE>
describing the singular number shall include the plural and vice versa, and
words denoting any gender shall include all genders and words denoting natural
persons shall include corporations and partnerships and vice versa.
SECTION 11.12. WAIVERS. Except as provided in this Merger Agreement, no
action taken pursuant to this Merger Agreement, including, without limitation,
any investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Merger Agreement. The
waiver by any party hereto of a breach of any provision hereunder shall not
operate or be construed as a waiver of any prior or subsequent breach of the
same or any other provision hereunder.
SECTION 11.13. SEVERABILITY. Any term or provision of this Merger
Agreement which is invalid or unenforceable in any jurisdiction shall, as to
that jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Merger Agreement or affecting the validity or
enforceability of any of the terms or provisions of this Merger Agreement in any
other jurisdiction. If any provision of this Merger Agreement is so broad as to
be unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.
SECTION 11.14. SUBSIDIARIES. As used in this Merger Agreement, the word
"subsidiary" when used with respect to any party means any corporation or other
organization, whether incorporated or unincorporated, of which such party
directly or indirectly owns or controls at least a majority of the securities or
other interests having by their terms ordinary voting power to elect a majority
of the board of directors or others performing similar functions with respect to
such corporation or other organization, or any organization of which such party
is a general partner.
[Signature pages follow.]
43
<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this
Merger Agreement to be executed by their respective officers thereunder duly
authorized all as of the date first written above.
MFS COMMUNICATIONS COMPANY, INC.
/s/ James Q. Crowe
-----------------------------------
Name: James Q. Crowe
Title: Chairman and CEO
MFS GLOBAL INTERNET SERVICES, INC.
/s/ James Q. Crowe
-----------------------------------
Name: James Q. Crowe
Title: President
UUNET TECHNOLOGIES, INC.
/s/ John W. Sidgmore
-----------------------------------
Name: John W. Sidgmore
Title: President and CEO
44
<PAGE>
Exhibit 9.1
STOCKHOLDER OPTION, VOTING AND PROXY AGREEMENT
DATED AS OF APRIL 29, 1996
AMONG
MFS COMMUNICATIONS COMPANY, INC
MFS GLOBAL INTERNET SERVICES, INC.
AND EACH OTHER PERSON AND ENTITY
LISTED ON THE SIGNATURE PAGES HEREOF.
<PAGE>
STOCKHOLDER OPTION, VOTING AND PROXY AGREEMENT, dated as of April 29, 1996,
(this "Agreement") among MFS COMMUNICATIONS COMPANY, INC., a Delaware
---------
corporation ("Parent"), MFS GLOBAL INTERNET SERVICES, INC., a Delaware
------
corporation and a wholly owned subsidiary of Parent ("Sub"), and each other
---
person and entity listed on the signature pages hereof (each, a "Stockholder").
-----------
WHEREAS, as of the date hereof, each Stockholder owns of record the
number of shares of common stock, $0.001 par value (the "Common Stock"), of
------------
UUNET Technologies, Inc., a Delaware corporation (the "Company"), set forth
-------
opposite such Stockholder's name on Exhibit A hereto (all such shares, together
with all shares of Common Stock of the Company which are hereafter acquired by
the Stockholders, being referred to herein as the "Shares");
------
WHEREAS, Parent, Sub and the Company have entered into an Agreement
and Plan of Merger dated as of the date hereof (the "Merger Agreement";
----------------
capitalized terms used but not otherwise defined in this Agreement have the
meanings assigned to such terms in the Merger Agreement), which provides, upon
the terms and subject to the conditions set forth therein, for the merger of Sub
with and into the Company (the "Merger"); and
------
WHEREAS, as a condition to the willingness of Parent and Sub to enter
into the Merger Agreement and in furtherance of the acquisition of the Company
by Parent, Parent and Sub have required that the Stockholders agree, and in
order to induce Parent and Sub to enter into the Merger Agreement, each
Stockholder has agreed, severally and not jointly, to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and
agreements contained herein, the parties hereto agree as follows:
ARTICLE I.
GRANT OF OPTION AND EXERCISE; TRANSFER AND
VOTING OF SHARES
SECTION 1.1. GRANT OF OPTION. Subject to the terms and conditions set
forth herein, each Stockholder hereby grants to Parent an irrevocable option
(the "Option") to purchase all such Stockholder's Shares held on the date of
Option exercise for 1.777776 fully paid and nonassessable shares of Parent
Common Stock (as adjusted in the circumstances described in Section 3.1(c) of
the Merger Agreement) per Share, together with the associated rights under
Parent's Rights Agreement ("Parent Rights Plan") dated as of September 30, 1995
between Parent and Continental Stock Transfer & Trust (together, the "Purchase
Price").
<PAGE>
SECTION 1.2. EXERCISE OF OPTION. Parent may exercise the Option, in
whole with respect to all of the Shares held by all of the Stockholders covered
hereby but not in part, at any time following the occurrence of a Purchase Event
(as defined in the Merger Agreement); provided that, except as provided in the
--------
last sentence of this Section 1.2(a), the Option shall terminate and be of no
further force and effect upon the earliest to occur of (i) the Effective Date,
(ii) 20 Business Days after the termination of the Merger Agreement other than
by reason of an event described in clause (iv) or (v) below, (iii)
[INTENTIONALLY OMITTED], (iv) exercise of the Company's right to terminate the
Merger Agreement because of a breach by Parent or Sub of any covenant or
agreement set forth in the Merger Agreement or the failure of any representation
or warranty of the Parent or Sub under Article IV of the Merger Agreement or of
the Parent under Article III of this Agreement to have been true in all material
respects when made or the failure of the holders of capital stock of Parent to
approve the Merger at the Parent Meeting, (v) the Merger Agreement has been
terminated pursuant to Section 10.1(a) or (b) of the Merger Agreement, or (vi)
the failure of the Closing (defined in Section 1.3 below) to occur within 30
Business Days of the Notice Date (defined in Section 1.3 below) unless (A) the
reason for such failure relates to the inability to satisfy the conditions to
register the shares of Parent Common Stock set forth in Section 1.9 of this
Agreement or for the notification period under the HSR Act to have expired, in
either case, for reasons outside of the control of Parent, and (B) Parent is
diligently pursuing the registration of such shares with the Commission or
promptly providing all necessary information to the Federal Trade Commission and
the Antitrust Division of the Department of Justice, as the case may be.
Notwithstanding the termination of the Option, Parent shall be entitled to
purchase the Shares in accordance with the terms hereof if it has exercised the
Option prior to the termination date, unless clause (iv) or (vi) above has been
triggered in which case the rights to exercise this Option shall immediately
cease.
SECTION 1.3. CLOSING DATE. In the event Parent wishes to exercise the
Option, which may be exercised in whole with respect to all of the Shares of all
of the Stockholders covered hereby but not in part, it shall send to each
Stockholder a written notice (the date of which being herein referred to as the
"Notice Date") specifying a place and date not earlier than five business days
-----------
nor later than 10 Business Days from the Notice Date for the closing of such
purchase (the "Closing Date"); provided that if the closing of the purchase and
------------ --------
sale pursuant to the Option (the "Closing") cannot be consummated by reason of
-------
any applicable judgment, decree, order, law or regulation, the period of time
that otherwise would run pursuant to this sentence shall run instead from the
date on which such restriction on consummation has expired or been terminated;
and, provided further that, without limiting the foregoing, if prior
-------- -------
2
<PAGE>
notification to or approval of any regulatory authority is required in
connection with such purchase, Parent and, if applicable, a Stockholder shall
promptly file the required notice or application for approval and shall
expeditiously process the same (and such Stockholder shall cooperate with Parent
in the filing of any such notice or application and the obtaining of any such
approval), and the period of time that otherwise would run pursuant to this
sentence shall run instead from the date on which, as the case may be, (i) any
required notification period has expired or been terminated or (ii) such
approval has been obtained, and in either event, any requisite waiting period
has passed. Parent agrees that it shall include the issuance of shares of
Parent Common Stock under this Agreement in the notifications under the HSR Act
filed pursuant to Section 8.6 of the Merger Agreement.
SECTION 1.4. PAYMENT AND DELIVERY OF CERTIFICATES.
(a) On the Closing Date, (i) Parent will deliver to the Stockholders
the Purchase Price and a certificate signed by the President or Chief
Executive Officer of Parent to the effect that Parent and the Sub have
complied with all covenants and agreements set forth in the Merger
Agreement and that all representations and warranties of the Parent and Sub
under Article IV of the Merger Agreement and of the Parent under Article
III of this Agreement were true in all material respects when made, and
(ii) the Stockholders shall deliver to Parent certificates representing the
Shares sold by the Stockholders to Parent at the Closing, duly endorsed in
blank or accompanied by stock powers duly executed by the Stockholders in
blank, in proper form for transfer.
(b) No certificates or scrip representing less than one share of
Parent Common Stock shall be issued upon the exercise of the Option. In
lieu of any such fractional share, each Stockholder who would otherwise
have been entitled to a fraction of a share of Parent Common Stock upon
exercise of the Option shall be paid at the Closing cash (without interest)
in an amount equal to such Stockholder's fractional part of a share of
Parent Common Stock multiplied by the last reported sale price of Parent
Common Stock, as reported on the Nasdaq National Market, on the Closing
Date.
SECTION 1.5. LEGENDS.
(a) Each Stockholder shall instruct the Company to cause each
certificate of any Stockholder evidencing the Shares to bear a legend in
the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED
OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE TERMS
AND CONDITIONS OF THE STOCKHOLDER OPTION, VOTING
3
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AND PROXY AGREEMENT DATED AS OF APRIL 29, 1996, AS IT MAY BE AMENDED, AMONG
MFS COMMUNICATIONS COMPANY, INC., MFS GLOBAL INTERNET SERVICES, INC. AND
THE REGISTERED HOLDER OF THIS CERTIFICATE, A COPY OF WHICH IS ON FILE AT
THE PRINCIPAL EXECUTIVE OFFICES OF THE ISSUER.
(b) In the event that the Shares shall cease to be subject to the
restrictions on transfer set forth in this Agreement, the Company shall,
upon the written request of the holder thereof, issue to such holder a new
certificate evidencing such Shares without the legend required by Section
1.5(a).
SECTION 1.6. VOTING AGREEMENT. Each Stockholder hereby agrees that
from the date hereof to the earlier to occur of the termination of the Merger
Agreement or the Effective Date, at any meeting of the stockholders of the
Company, however called, and in any action by consent of the stockholders of the
Company, such Stockholder shall vote the Shares; (A) in favor of the Merger, the
Merger Agreement (as amended from time to time) and the transactions
contemplated by the Merger Agreement and (B) against any proposal for any
recapitalization, merger (other than the Merger), sale of assets or other
business combination between the Company and any person or entity (other than
Parent or Sub) or any other action or agreement that would result in a breach of
any covenant, representation or warranty or any other obligation or agreement of
the Company under the Merger Agreement or which would result in any of the
conditions to the Merger Agreement not being fulfilled.
SECTION 1.7. NO DISPOSITION OR ENCUMBRANCE OF SHARES AND OPTIONS.
Except to the extent set forth in Exhibit A, each Stockholder hereby covenants
and agrees that, from the date hereof to the termination of the rights of Parent
under Sections 1.2, 1.6 and 1.8 of this Agreement, it shall not, and shall not
offer or agree to, sell, transfer, tender, assign, hypothecate or otherwise
dispose of, or create or permit to exist any Encumbrance (as hereinafter
defined) on the Shares owned by such Stockholder at any time prior to the
Effective Date.
SECTION 1.8. VOTING OF SHARES; FURTHER ASSURANCES.
(a) Each Stockholder, by this Agreement, with respect to its Shares,
does hereby constitute and appoint Sub and Parent, or any nominee of Sub
and Parent, with full power of substitution, from the date hereof to the
earlier to occur of the termination of the Merger Agreement or the
Effective Date, as its true and lawful attorney and proxy (its "Proxy"),
-----
for and in its name, place and stead, to vote each of such Shares as its
Proxy, at every annual, special or adjourned meeting of the stockholders of
the Company, including the right to sign its name (as stockholder) to any
consent, certificate or other document relating to the
4
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Company that the law of the State of Delaware may permit or require:
(i) in favor of the Merger, the Merger Agreement (as amended
from time to time) and the transactions contemplated by the Merger
Agreement; and
(ii) against any proposal for any recapitalization, merger
(other than the Merger), sale of assets or other business combination
between the Company and any person or entity (other than Parent or
Sub) or any other action or agreement that would result in a breach of
any covenant, representation or warranty or any other obligation or
agreement of the Company under the Merger Agreement or which could
result in any of the conditions to the Merger Agreement not being
fulfilled.
THIS POWER OF ATTORNEY IS IRREVOCABLE, IS GRANTED IN CONSIDERATION OF
PARENT AND SUB ENTERING INTO THE MERGER AGREEMENT AND IS COUPLED WITH AN
INTEREST SUFFICIENT IN LAW TO SUPPORT AN IRREVOCABLE POWER. This
appointment shall revoke all prior attorneys and proxies appointed by any
Stockholder at any time with respect to the Shares and no subsequent
attorneys or proxies will be appointed by such Stockholder, or be
effective, with respect thereto during the term of this Agreement.
(b) Each Stockholder shall perform such further acts and execute such
further documents and instruments as may reasonably be required to vest in
Sub and Parent the power to carry out and give effect to the provisions of
this Agreement.
SECTION 1.9. REGISTRATION. Notwithstanding anything in this Agreement
------------
to the contrary, the obligation of the Stockholders to transfer their Shares to
Parent at the Closing shall be conditioned upon the issuance of Parent Common
Stock to the Stockholders being registered pursuant to the Securities Act at the
Closing. Parent shall include such issuance of shares of Parent Common Stock in
the Registration Statement on Form S-4 being filed pursuant to the Merger
Agreement.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
Each Stockholder, severally and not jointly, hereby represents and
warrants to Parent as follows:
SECTION 2.1. DUE ORGANIZATION, AUTHORIZATION, ETC. Such Stockholder
(if it is a corporation, partnership or other legal entity) is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation
5
<PAGE>
or organization. Such Stockholder has all requisite power (corporate or
otherwise) to execute and deliver this Agreement, to grant the Option and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement, the appointment of Parent and Sub as such Stockholder's Proxy,
the granting of the Option and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary action (corporate or
otherwise) on the part of such Stockholder. This Agreement has been duly
executed and delivered by or on behalf of such Stockholder and, assuming its due
authorization, execution and delivery by Parent, constitutes a legal, valid and
binding obligation of such Stockholder, enforceable against such Stockholder in
accordance with its terms.
SECTION 2.2. NO CONFLICTS, REQUIRED FILINGS AND CONSENTS.
(a) Except as disclosed on Exhibit A, the execution and delivery of this
Agreement by such Stockholder do not, and the performance of this Agreement
by such Stockholder will not, (i) conflict with or violate the Certificate
of Incorporation by By-Laws or other similar organizational documents of
such Stockholder (in the case of a Stockholder that is a corporation,
partnership or other legal entity), (ii) conflict with or violate any
statute, law, ordinance, rule, regulation, order, decree or judgment
applicable to such Stockholder or by which it or any of its properties is
bound or affected, or (iii) result in any breach of or constitute a default
(with notice or lapse of time, or both) under, or give to others any rights
of termination, amendment, acceleration or cancellation of, or result in
the creation of a lien or encumbrance on any of the property or assets of
such Stockholder or (if such Stockholder is a corporation, partnership or
other legal entity) any of its subsidiaries, including, without limitation,
the Shares, pursuant to, any indenture or other loan document provision or
other contract, license, franchise, permit or other instrument or
obligation to which such Stockholder is a party or by which such
Stockholder or any of its properties is bound or affected, except, in the
case of clauses (ii) and (iii), for any such breaches, defaults or other
occurrences that would not prevent or delay the performance by such
Stockholder of its obligations under this Agreement.
(b) The execution and delivery of this Agreement by such Stockholder do
not, and the performance of this agreement by such Stockholder will not,
require any consent, approval, authorization or permit of, or filing with
or notification to, any governmental or regulatory authority, domestic or
foreign, except where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would
not prevent or delay
6
<PAGE>
the performance by the Stockholder of its obligations under this Agreement.
SECTION 2.3. TITLE TO SHARES. Such Stockholder has, and the transfer
by the Stockholder of the Shares hereunder will pass, good and marketable title
to the Shares listed on Exhibit A hereto, free and clear of any pledge, lien,
security interest, mortgage, charge, claim, equity, option, proxy, voting
restriction, right of first refusal, limitation on disposition, adverse claim of
ownership or use or encumbrance of any kind ("Encumbrances"), except to the
------------
extent disclosed on Exhibit A and for Shares sold prior to the Closing as
permitted under Section 1.7.
SECTION 2.4. NO BROKERS. Except for Goldman, Sachs & Co. or as set
forth in the Company Disclosure Letter, no broker, finder or investment banker
is entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of such Stockholder.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to each Stockholder as follows:
SECTION 3.1 ORGANIZATION AND QUALIFICATION. Parent is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power to carry on its business as it is
now being conducted or currently proposed to be conducted. Parent is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities make such qualification necessary, except
where the failure to be so qualified will not, individually or in the aggregate,
have a material adverse effect on the business, properties, assets, condition
(financial or otherwise), liabilities or operations of Parent and its
subsidiaries taken as a whole (a "Parent Material Adverse Effect"). Complete
------------------------------
and correct copies as of the date hereof of the Certificate of Incorporation and
By-laws of Parent have been delivered to the Company as part of a disclosure
letter delivered by Parent to the Company on or prior to the date of this
Agreement pursuant to the Merger Agreement (the "Parent Disclosure Letter").
--------------------------
SECTION 3.2 CAPITALIZATION. The authorized capital stock of Parent
consists of 400,000,000 shares of Parent Common Stock, and 25,000,000 shares of
preferred stock, $.01 par value. As of April 26, 1996 (after giving effect to
the stock split on that day), (i) 125,804,234 shares of Parent Common Stock were
validly issued and outstanding, fully paid and nonassessable,
7
<PAGE>
(ii) 95,000 shares of Parent's Series A 8% Cumulative Convertible Preferred
Stock, were validly issued and outstanding, fully paid, and nonassessable and
(iii) 15,000,000 shares of Series B Cumulative Convertible Preferred Stock were
validly issued and outstanding, fully paid, and nonassessable. As of the date
hereof, there are no bonds, debentures, notes or other indebtedness having the
right to vote on any matters on which the Parent's stockholders may vote
("Parent Voting Debt") issued or outstanding. As of April 26, 1996 (after giving
------------------
effect to the stock split on that day), except for options to acquire 20,614,274
shares of Parent Common Stock pursuant to the Parent's 1992 Stock Plan and 1993
Stock Plan, warrants to purchase 1,500,000 shares of Parent Common Stock,
commitments to issue shares of Parent Common Stock under Parent's Shareworks and
Shareworks Plus programs and commitments to issue shares of Parent Common Stock
to non-employee directors pursuant to Parent's 1993 Stock Plan, and, except as
provided herein and in the Parent Rights Plan, there are no options, warrants,
calls or other rights, agreements or commitments presently outstanding
obligating Parent to issue, deliver or sell shares of its capital stock or debt
securities, or obligating Parent to grant, extend or enter into any such option,
warrant, call or other such right, agreement or commitment. All of the shares of
Parent Common Stock issuable in accordance with this Agreement in exchange for
Company Common Stock at the Closing will be, when so issued, duly authorized,
validly issued, fully paid and nonassessable and shall be delivered free and
clear of any pledge, lien, security interest, mortgage, charge, claim, equity,
option, proxy, voting restriction, right of first refusal, limitation on
disposition, adverse claim of ownership or use or encumbrance of any kind
("Encumbrances"), including any preemptive rights of any stockholder
------------
of Parent.
SECTION 3.3 SUBSIDIARIES. The only "Significant Subsidiaries" (as
such term is defined in Rule 1-02 of Regulation S-X of the Securities and
Exchange Commission (the "Commission")) ("Significant Subsidiaries") of Parent
---------- ------------------------
are those named in Section 4.3 of the Parent Disclosure Letter or set forth on
Exhibit 22 to Parent's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. Each Significant Subsidiary incorporated in the United
States is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and has the corporate power
to carry on its business as it is now being conducted or currently proposed to
be conducted. Each Significant Subsidiary is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary except where the failure to be so
qualified will not have a Parent Material Adverse Effect. Except as disclosed
in Section 4.3 of the Parent Disclosure Letter, all the outstanding shares of
capital stock of each Significant Subsidiary are validly issued, fully paid and
nonassessable and owned by Parent or by a Significant Subsidiary of Parent free
and
8
<PAGE>
clear of any Encumbrances. There are no existing options, warrants, calls
or other rights, agreements or commitments of any character relating to the
issued or unissued capital stock or other securities of any of the Significant
Subsidiaries of Parent. Except as set forth in the Parent's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, as disclosed in Section
4.3 of the Parent Disclosure Letter and except for wholly owned subsidiaries
which are formed after the date hereof in the ordinary course of business,
Parent does not directly or indirectly own any interest in any other
corporation, partnership, joint venture or other business association or entity
that is a Significant Subsidiary.
SECTION 3.4 AUTHORITY RELATIVE TO THE AGREEMENT.
(a) Parent has the corporate power to execute and deliver this
Agreement and to carry out its obligations hereunder. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by Parent's Board of
Directors. The Agreement constitutes a valid and binding obligation of
Parent, enforceable against Parent in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and except that
the availability of equitable remedies, including specific performance, is
subject to the discretion of the court before which any proceeding therefor
may be brought. No other corporate proceedings on the part of Parent are
necessary to authorize the execution and delivery by Parent of this
Agreement or the consummation of the transactions contemplated hereby.
(b) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby, does not and will not result in
the change in conversion ratios, conversion rights or voting rights, or the
breach, violation, default (with or without notice or lapse of time, or
both), termination, cancellation or acceleration of any obligation, or the
loss of a material benefit, under (i) the Parent's charter or by-laws or
(ii) any indenture or other loan document provision or other contract,
license, franchise, permit, order, decree, concession, lease, instrument,
judgment, statute, law, ordinance, rule or regulation applicable to Parent
or any of its subsidiaries or their respective properties or assets, other
than, in the case of clause (ii) only, (A) any breaches, violations,
defaults, terminations, cancellations, accelerations or losses which,
either singly or in the aggregate, will not have a Parent Material Adverse
Effect or prevent the consummation of the transactions contemplated hereby
and (B) the laws and regulations referred to in the next paragraph.
9
<PAGE>
(c) Except as disclosed in Section 4.4 of the Parent Disclosure
Letter, or in connection, or in compliance, with the provisions of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
---
Act"), the Securities Act of 1933, as amended (the "Securities Act"), the
--- --------------
Securities Exchange Act of 1934 (the "Exchange Act"), and the corporation,
------------
securities or blue sky laws or regulations of the various states, no filing
or registration with, or authorization, consent or approval of, any public
body or authority is necessary for the consummation by Parent of the
transactions contemplated by this Agreement, other than filings,
registrations, authorizations, consents or approvals the failure of which
to make or obtain will not have a Parent Material Adverse Effect or prevent
the consummation of the transactions contemplated hereby.
SECTION 3.5 REPORTS AND FINANCIAL STATEMENTS. Parent has previously
furnished the Company with true and complete copies of its (i) Annual Report on
Form 10-K, as amended, for the fiscal years ended December 31, 1994 and December
31, 1995, as filed with the Commission, (ii) proxy statements related to all
meetings of its stockholders (whether annual or special) since January 1, 1994,
and (iii) all other reports or registration statements filed by Parent with the
Commission under the Exchange Act since December 31, 1992 through the date
hereof, except Quarterly Reports on Form 10-Q for fiscal quarters ended prior to
December 31, 1995 (the items in clauses (i) through (iii) being referred to
herein collectively as the "Parent SEC Reports"). As of their respective dates,
------------------
the Parent SEC Reports complied in all material respects with the requirements
of the Exchange Act, and the rules and regulations of the Commission thereunder
applicable to such Parent SEC Reports. As of their respective dates, the Parent
SEC Reports did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited consolidated financial statements and unaudited
interim financial statements of Parent included in the Parent SEC Reports comply
as to form in all material respects with applicable accounting requirements and
with the published rules and regulations of the Commission with respect thereto.
The financial statements included in the Parent SEC Reports: have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis (except as may be indicated therein or in the notes thereto);
present fairly, in all material respects, the financial position of Parent and
its subsidiaries as at the dates thereof and the results of their operations and
cash flows for the periods then ended subject, in the case of the unaudited
interim financial statements, to normal year-end audit adjustments, any other
adjustments described therein and the fact that certain information and notes
have been condensed or omitted in accordance with the Exchange Act and the rules
promulgated
10
<PAGE>
thereunder; and are in all material respects, in accordance with the books of
account and records of Parent.
SECTION 3.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
disclosed in the Parent SEC Reports or as disclosed in Section 4.6 of the Parent
Disclosure Letter, from December 31, 1995 through the date of this Agreement,
there has not been (i) any transaction, commitment, dispute or other event or
condition (financial or otherwise) of any character (whether or not in the
ordinary course of business) individually or in the aggregate having a Parent
Material Adverse Effect (other than as a result of changes in laws or
regulations of general applicability); (ii) any damage, destruction or loss,
whether or not covered by insurance, which would have a Parent Material Adverse
Effect; or (iii) any entry into any commitment or transaction material to Parent
and its subsidiaries taken as a whole (including, without limitation, any
borrowing or sale of assets) except in the ordinary course of business
consistent with past practice.
ARTICLE IV.
ADJUSTMENTS
SECTION 4.1. DISTRIBUTIONS; ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
(a) Any dividends or other distributions (whether payable in cash, stock
or otherwise) by the Company with respect to any Shares purchased hereunder
with a record date on or after the Closing Date will belong to Parent. If
any such dividend or distribution belonging to Parent is paid by the
Company to the Stockholder, the Stockholder shall hold such dividend or
distribution in trust for the benefit of Parent and shall promptly remit
such dividend or distribution to Parent in exactly the form received,
accompanied by appropriate instruments of transfer.
(b) If on or after the date of this Agreement there shall occur any
stock dividend, stock split, recapitalization, combination or exchange of
shares, merger, consolidation, reorganization or other change or
transaction of or by the Company, as a result of which shares of any class
of stock, other securities, cash or other property shall be issued in
respect of any Shares or if any Shares shall be changed into the same or
another class of stock or other securities, then, upon exercise of the
Option, Parent shall receive for the aggregate price payable upon exercise
of the Option with respect to the Shares, all such shares of stock, other
securities, cash or other property issued, delivered or received with
respect to such Shares (or if the Option shall not be exercised,
appropriate adjustment shall be made for purposes of the calculations set
forth in this Agreement).
11
<PAGE>
ARTICLE V.
SECTION 5.1. NO SOLICITATION OF TRANSACTIONS.
Each Stockholder covenants and agrees that in its capacity as a
stockholder of the Company it shall not, directly or indirectly, take (nor shall
the Stockholder authorize or permit its officers, directors, partners,
stockholders, employees, representatives, investment bankers, attorneys,
accountants or other agents or affiliates (the "Representatives"), to take and
---------------
the Representatives shall not take, on behalf of the Stockholder) any action to
(i) encourage, solicit or initiate the submission of any Acquisition Proposal or
a proposal for the acquisition, purchase or option to purchase any of the
Shares, (ii) enter into any agreement with respect to any Acquisition Proposal
or any acquisition or purchase of all or any of the Shares or (iii) participate
in any way in discussions or negotiations with, or furnish any information to,
any person in connection with, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Acquisition Proposal or a proposal to acquire or
purchase any of the Shares. The Stockholder will promptly communicate to Parent
any solicitation received by it in its capacity as a stockholder of the Company
with respect to an Acquisition Proposal and the terms of such proposal or
inquiry, including the identity of the person and its affiliates making the
same, that it may receive in respect of any such transaction, or of any such
information requested from it or of any such negotiations or discussions being
sought to be initiated with it. "Acquisition Proposal" shall mean any proposed
--------------------
(A) merger, consolidation or similar transaction involving the Company, (B)
sale, lease or other disposition directly or indirectly by merger,
consolidation, share exchange or otherwise of assets of the Company or its
subsidiaries representing 10% or more of the consolidated assets of the Company
and its subsidiaries other than in the ordinary course of business, (C) issue,
sale, or other disposition of (including by way of merger, consolidation, share
exchange or any similar transaction) securities (or options, rights or warrants
to purchase, or securities convertible into or exchangeable for, such
securities) representing 10% or more of the voting power of the Company or (D)
transaction in which any person shall acquire beneficial ownership (as such term
is defined in Rule 13d-3 under the Exchange Act), or the right to acquire
beneficial ownership or any "group" (as such term is defined under the Exchange
Act) shall have been formed which beneficially owns or has the right to acquire
beneficial ownership of 25% or more of the outstanding Common Stock.
12
<PAGE>
ARTICLE VI.
COVENANTS OF THE STOCKHOLDERS.
SECTION 6.1. NEGATIVE COVENANTS. Each Stockholder agrees, until the
Option has terminated, not to:
(a) sell, transfer, pledge, assign or otherwise dispose of, or enter
into any contract, option or other arrangement with respect to the sale,
transfer, pledge, assignment or other disposition of, the Shares owned by
such Stockholder to any person other than Parent or Parent's designee and
except as contemplated in Exhibit A;
(b) acquire any additional shares of Common Stock without the prior
consent of Parent other than pursuant to rights under the Company Employees
Stock Purchase Plan or options outstanding on the date of this Agreement;
or
(c) deposit any Shares into a voting trust or grant a proxy or enter
into a voting agreement with respect to any Shares, except for this
Agreement.
SECTION 6.2. FURTHER ASSURANCES. If Parent shall exercise the Option
in accordance with the terms of this Agreement, from time to time and without
additional consideration the Stockholder will execute and deliver, or cause to
be executed and delivered, such additional or further transfers, assignments,
endorsements, consents and other instruments as Parent may reasonably request
for the purpose of effectively carrying out the transactions contemplated by
this Agreement, including the transfer of the Shares to Parent and the release
of any and all Encumbrances with respect thereto.
ARTICLE VII.
MISCELLANEOUS
SECTION 7.1. NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. All representations, warranties and agreements made by the parties
to this Agreement shall terminate at the Closing.
SECTION 7.2. EXPENSES. Except as otherwise provided herein, all costs
and expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such costs and expenses.
SECTION 7.3. NOTICES. All notices or other communications under this
Agreement shall be in writing and shall be given by delivery in person, by
facsimile, cable, telegram, telex or other standard form of telecommunications,
or by registered or certified mail, postage prepaid, return receipt requested,
addressed as follows (or such other address for a
13
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party as shall be specified in a notice given in accordance with this Section
6.3) and shall be deemed to have been given one business day after transmission
by facsimile, cable, telegram, telex of other standard form of
telecommunications or four days after deposit in the U.S. mail:
If to a Stockholder, at the address or facsimile number of such Stockholder
set forth on Exhibit A, with a copy to:
UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, VA 22031
Attention: General Counsel
Facsimile No.: (703) 206-5807
and
Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, CA 94301
Attn: August J. Moretti
and Richard Friedman
Facsimile: (415) 324-0638
If to Parent or Sub:
MFS Communications Company, Inc.
3555 Farnam Street, 2nd Floor
Omaha, Nebraska 68131
Attention: General Counsel
Facsimile No.: (402) 977-5335
With a copy to:
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: John S. D'Alimonte, Esq.
Facsimile No.: (212) 821-8111
SECTION 7.4. SEVERABILITY. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
SECTION 7.5. ENTIRE AGREEMENT. This Agreement and any documents
delivered by the parties in connection herewith
14
<PAGE>
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings among the
parties with respect thereto. No addition to or modification of any provision of
this Agreement shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
SECTION 7.6. ASSIGNMENT, BINDING EFFECT. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties, except that Parent or Sub may assign
all or any of their rights and obligations hereunder to any affiliate of Parent,
provided that no such assignment shall relieve Parent or Sub of its obligations
hereunder if such assignee does not perform such obligations. Subject to the
preceding sentence, this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
Notwithstanding anything contained in this Agreement to the contrary, nothing in
this Agreement, expressed or implied, is intended to confer on any person other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
SECTION 7.7. SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any Delaware Court, this
being in addition to any other remedy to which they are entitled at law or in
equity.
SECTION 7.8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD
TO ITS RULES OF CONFLICT OF LAWS.
SECTION 7.9. HEADINGS. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
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SECTION 7.10. COUNTERPARTS. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a
number of copies hereof each signed by less than all, but together signed by all
of the parties hereto.
[Signature Pages follow.]
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IN WITNESS WHEREOF, Parent has caused this Agreement to be executed by its
officers thereunto duly authorized and each Stockholder has caused this
Agreement to be executed, or duly executed by an authorized signatory, all as of
the date first written above.
MFS COMMUNICATIONS COMPANY, INC.
By /s/ James Q. Crowe
--------------------------
Name: James Q. Crowe
Title: Chairman of the
Board and Chief
Executive Officer
MFS GLOBAL INTERNET SERVICES, INC.
By /s/ James Q. Crowe
------------------------------
Name: James Q. Crowe
Title: President
[Entity Stockholder]
By__________________________
Name:
Title:
----------------------------
[Individual Stockholder]
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Exhibit A
---------
LIST OF STOCKHOLDERS
Name and address Number of Shares
of Stockholder of Common Stock
----------------- ------------------
Richard L. Adams, Jr. 4,700,000(1)
c/o UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, VA 22031
Facsimile: (703) 206-5805
Microsoft Corporation 4,164,000
1 Microsoft Way
Redmond, WA 98052
Attn: Robert Eschelman
Facsimile: (206) 869-1327
Menlo Ventures IV, L.P. 2,563,031
Menlo Evergreen V, L.P. 666,667
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025
Attn: John W. Jarve
Facsimile: (415) 854-7059
John W. Sidgmore 1,091,455(2)
c/o UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, VA 22031
Facsimile: (703) 206-5805
New Enterprise Associates V, 3,229,698
Limited Partnership
1119 St. Paul Street
Baltimore, MD 21202
Attn: Peter J. Barris and
Nancy Dorman
Facsimile: (410) 752-7721
Accel IV L.P. 2,958,403
Accel Investors '93 L.P. 119,499
One Palmer Square
Princeton, NJ 08542
Attn: Carter Sednaoui
Facsimile: (609) 683-0384
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Les B. Straus 53,472
PictureTel
The Tower at Northwoods
222 Rosewood Drive
Danvers, MA 01923
Facsimile: (508) 762-5219
Daniel C. Lynch 34,500
25560 La Lanne Court
Los Altos Hills, CA 94022
Facsimile: (415) 948-0757 __________
TOTAL 19,580,725
_____________________
(1) Of the 4,700,000 shares held by Mr. Adams, 325,000 shares may be sold,
gifted or otherwise transferred without restriction under this Agreement
prior to the Closing.
(2) Of the 1,091,455 shares held by Mr. Sidgmore, 355,458 of such shares are
subject to a right of repurchase by the Company if Mr. Sidgmore voluntarily
terminates his employment with the Company before June 27, 1996. In
addition, as of April 30, 1996, the Company has a right of repurchase with
respect to another 562,807 of such shares in the event that Mr. Sidgmore's
employment with the Company is terminated and which right of repurchase
expires with respect to 14,810.70 shares of the last day of each calendar
month so long as Mr. Sidgmore remains employed by the Company; provided,
that such right of repurchase expires with respect to 50 percent of such
shares subject to a right of repurchase in the event of a Change in Control
or involuntary Termination Other Than For Cause (each, as defined in the
Nonstatutory Stock Option Agreement between the Company and Mr. Sidgmore
dated as of July 20, 1994).
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Joint Proxy Statement-
Prospectus on Form S-4 of MFS Communications Company, Inc. of our report dated
February 14, 1996, on our audit of the consolidated financial statements of MFS
Communications Company, Inc. as of December 31, 1995 and 1994, and for the three
years in the period ended December 31, 1995 which report is included in MFS
Communications Company, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1995. We also consent to the reference to our firm under the
caption "Experts".
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Omaha, Nebraska
May 20, 1996
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Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Washington, D.C.
May 17, 1996
<PAGE>
Exhibit 23.5
CONSENT OF PERSON ABOUT TO BECOME A DIRECTOR
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to his being named in the prospectus forming a part
of this Registration Statement as a person about to become a director of MFS
Communications Company, Inc.
/s/ John W. Sidgmore
--------------------
Date: May 20, 1996
<PAGE>
Exhibit 23.6
CONSENT OF PERSON ABOUT TO BECOME A DIRECTOR
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to his being named in the prospectus forming a part
of this Registration Statement as a person about to become a director of MFS
Communications Company, Inc.
/s/ Richard L. Adams, Jr.
-------------------------
Date: May 20, 1996
